DBS Group - OCBC Investment 2021-08-05: 1H21 Beat, Guidance Lifted


DBS Group - 1H21 Beat, Guidance Lifted

  • DBS's 1H21 net profit rose 54% y-o-y to a record S$3.71bn.
  • Asset quality trends remain resilient, new NPAs at pre-pandemic levels.
  • 2Q21 dividend of S$0.33 was declared.
  • Double-digit share price gains year to date, underscoring our prior Buy calls.
  • Fair value estimate for DBS is lifted to S$34, which incorporates an improving outlook and a premium for DBS’s better than global industry average ESG performance.

DBS's 1H results beat expectations

  • DBS (SGX:D05)'s 1H net profit gained 54% y-o-y to a record S$3.71 bn, driven by strong business momentum and stable asset quality (allowances were cut 95% y-o-y). Total income of S$7.4bn fell 4% y-o-y, while profit before allowances declined 8% y-o-y to S$4.31bn due to lower NIMs and investment gains. Cost income ratio ~42%, with expenses up 3%. 1H ROE improved to 14% (from 9.5% a year ago).
  • 1H net interest income fell 12% y-o-y to S$4.2bn weighed by continued pressure on NIMs (-27bps to 1.47%), which more than offset loans and deposit growth (+9% y-o-y, proportion of CASA deposits picked up to 76% from 66% a year ago). For 1H, loans grew 7% y-o-y led by recovery across different segments, while fee income (+20% y-o-y, driven by wealth management fees +27% (AUM +13% to $285bn) and card fees +10% as online consumer spending picked up) and treasury markets income (+31% y-o-y) set new records, helping to more than offset declines in investment gains and interest rates.

DBS's 2Q21 highlights

  • Net income of S$1.7bn grew 37% y-o-y. DBS's fee income was 9% lower q-o-q as wealth fees moderated from record levels reached in 1Q21. Fee income grew 27% y-o-y with all activities growing by double digit percentages. Wealth management fees +31%, Investment banking fees more than doubled while card fees grew 26%. Other non interest income fell 15% y-o-y and 20% q-o-q, due to lower trading income and investment gains. Profit before allowances -10% q-o-q, -9% y-o-y. Cost income ratio was higher at 43%, vs 1Q21’s 41%.
  • Asset quality remains resilient, new non performing assets (NPA) formation and specific provisions (SP) has normalized to pre-pandemic levels - DBS's NPL ratio improved from 1.6% to 1.5%. New NPA formation was substantially mitigated by repayments, 1H SP ~18bps of loans. Small provisions writeback was made from GP due to improved portfolio quality. GP reserves $0.8bn above regulatory requirements and $1.2bn above tier 2 eligibility. Allowance coverage ~109% or 199% including collateral.
  • Balance sheet remains strong, interim 2Q21 dividend per share has been returned to pre-pandemic levels following recent regulatory green light - Following the lifting of restrictions by MAS announced in July 2021, DBS declared a dividend of S$0.33 for 2Q21, bringing 1H21 dividend to S$0.51. CET1 rose 0.2% to 14.5%, with leverage ratio of 6.8% more than double the regulatory minimum required. Scrip dividend will be suspended. Looking ahead, management is on the lookout for potential bolt-on M&A opportunities which may come up.

Guidance lifted on strong business momentum, moratorium loans now make up ~0.6% of total loans

  • Management’s outlook remains constructive, given continued healthy loans and transaction pipelines. DBS has raised its guidance for full year loan growth to high single digit, while expecting full year fee income growth to reach mid-teens level and expenses and asset quality to be stable. Given that asset quality has been better than initially expected, helped by government support measures and improvement in the economic environment, full year total allowances are not likely to cross S$0.5bn (improved from prior guidance of S$1bn). Portfolio quality looks resilient and new NPA formation and SP have recovered to pre-pandemic levels (however, this remains an area that the bank is watching carefully over in the coming months and quarters given various economies are still seeing some form of government support at this point, which should taper off over time).
  • Working on new initiatives to grow its medium term revenue stream DBS expects its new initiatives announced previously (inorganic growth via Lakshimi Vilas Bank and Shenzhen Rural Commercial Bank; new businesses: Digital Exchange, Climate Impact X, Partior, Muzinich Fund, EvolutionX-a $500mn debt financing platform to growth stage tech related companies in China/India/SEA which will be jointly launched with Temasek, and acceleration of: China Securities Joint Venture, retail wealth strategy and supply chain financing) to deliver revenues of about S$350mn in 2022E, a higher S$200mn from this year.

Solid double-digit total returns year to date, lifting DBS's fair value to S$34

  • DBS's share price has delivered total returns of +23.6% year to date (as of 04 August 2021 close, vs MSCI Singapore’s 14.8% returns over the same period), underscoring our previous Buy calls. Following the latest beat in 1H results and incorporating management’s latest guidance as well as a premium for DBS’s better ESG performance (above global industry average), we lift our estimates to reflect expectations for an improved growth outlook ahead. Our fair value estimate for DBS is raised to S$34, which implies 1.5x FY22E price/book (or 1.6x trailing price/book).
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  • While NIMs should remain stable due to a low rate environment, we remain positive on DBS’s ongoing efforts on various new business drivers, which bodes well for its medium term growth prospects and should support continued improvement in ROEs as the economic recovery strengthens further (although a more meaningful pick-up in ROE towards the 13% level should still be driven by higher interest rates).

ESG updates

DBS's ESG performance is above average among global peers.

  • DBS’s subsidiary has become a signatory to the Equity Principles in November 2019 (better focus on environmental strategies in its project finance loans) and has robust corporate governance practices as well as financial inclusion initiatives that involves underbanked segments and small medium enterprises, which is driven by a clear digitalization strategy (digibank app to open accounts, algorithmic models to approve small ticket sized loans etc). Its board is majority independent, supporting risk management oversight and executive remuneration practices are aligned well with shareholders’ long term interests.
  • Our fair value has also incorporated a premium for its relatively better performance compared to global peers.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-08-05
SGX Stock Analyst Report BUY MAINTAIN BUY 34.000 UP 33.000