DBS Group - Phillip Securities 2021-05-02: Inflection Point


DBS Group - Inflection Point

  • DBS (SGX:D05)'s 1Q21 earnings above, at 34.5% of our FY21e forecast. The strong beat came from net fee income and a S$190mn reversal in GPs.
  • NIM fell 37bps to 1.49%, at the upper-end of guidance. Loan growth of 7% y-o-y cushioned NII. NIM was unchanged from last quarter. Fees and commissions surged 15% y-o-y, rising above pre-COVID levels.
  • Credit cost stabilised, resulting in a general allowance write-back of S$190mn and SPs returning to pre-pandemic S$200mn or 21 basis points. Total allowances in FY21e likely to be below S$1bn.
  • Maintain ACCUMULATE on DBS with higher GGM target price of S$31.40, from S$29.50.

The Positives

Net Interest Income up 2% q-o-q on day-adjusted basis

  • DBS's 1Q21 net interest income grew 2% q-o-q to S$2.11bn, adjusted for the number of days in the quarter. NIM was unchanged at 1.49% q-o-q, and remained at the upper-end of its guidance.
  • Loans growth was broad-based, and grew 3% q-o-q in constant-currency terms while deposits increased 2% from the previous quarter.

Net fee income increased 15% y-o-y rising above pre-COVID levels

  • DBS's wealth-management fees increased 24% to a record S$519mn on the back of strong investor demand for a wide range of investment products in a low-interest-rate environment. Transaction services were up 10% to a new high of S$230mn as trade finance and cash management fees mitigated a fall in card-related fees.
  • DBS's investment banking fees jumped 36% from higher fixed income and equity-market activities. Management guided that the pipeline for both debt and equity capitals remains healthy.

Credit cost stabilising, resulting in GP write-back of S$190mn

  • Stabilising asset quality allowed the bank to write-back S$190mn of GPs. SPs of S$200mn or 21 basis points back to pre-pandemic levels. Delinquencies for both corporate and consumer segments stayed low despite the tapering of loan moratoriums.
  • DBS's FY21 allowances likely to be below S$1bn vs S$3bn in FY20. GP reserves at S$4.13bn, in excess of MAS’ requirement by 31%.
  • We believe FY21 provisions is sufficient to account for asset-quality deterioration in FY21 and expect credit costs to normalise to pre-COVID levels along with the economic recovery.

The Negative

No indication when MAS will lift dividend cap

  • In 2020, MAS had called on local banks to cap their total dividend at 60% of the amount in FY19. As it has yet to lift the dividend cap, DBS declared dividend of S$0.18 per share for 1Q21.
  • With its capital and liquidity – CET-1 ratio of 14.3% in 1Q21 vs 13.9% last year - well above regulatory requirements and high allowance reserves, we believe DBS will revert to paying dividend S$0.33 per quarter or an annualised dividend of S$1.32 per share once the cap is lifted. We do not rule out special dividends.

DBS Group - Outlook

Business momentum strong

  • Singapore’s latest economic data confirm a strengthening of the global economic rebound. Business momentum, hence, is expected to be strong. We upgrade our estimates on DBS's FY21e and FY22e fee income by 2.6% and 2.7% respectively. We also lower allowance estimates for FY21e. Consequently, our earnings forecast for DBS's FY21e/FY22e are raised by 5.6%/1.0%.

Acquisitions to drive future growth

  • DBS’s LVB consolidation will expand the bank’s footprint in India. Earlier operating concerns have waned after DBS took decisive action to provide for NPAs.
  • DBS’s recent acquisition of a 13% stake in Shenzhen Rural Commercial Bank for RMB 5.3bn or S$1.1bn - at 1.01x FY20 P/BV - should also allow it to tap growth opportunities in the Greater Bay Area. The acquisition – subject to approval from China Securities Regulatory Commission – should help it further penetrate the Chinese consumer market and is expected to be immediately earnings-and ROE-accretive. On a pro-forma basis assuming DBS had owned a 13% stake in Shenzhen Rural Commercial Bank since the start of 2020, the acquisition would translate to about S$113mn of associate income to DBS, assuming an exchange rate of RMB4.90/1.

Investment Action

Maintain ACCUMULATE with higher target price of S$31.40, up from S$29.50

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2021-05-02