DBS Group Holdings Ltd – Allowances dent record operating result May 4, 2020 1330

PSR Recommendation: ACCUMULATE Status: Maintained
Last Close Price: S$33.5 Target Price: S$20.59
  • 1Q20 earnings of $1.17bn missed original estimates of $1.59bn. However, pre-provision operating profit (PPOP) of $2.47bn was 15% higher than previous estimates.
  • $1.09bn of allowances was undertaken to build-up capital buffer from the impact of COVID-19. Two-thirds were booked as GP while the remainder was from SP.
  • The bank expects credit costs to increase by $3bn-5bn (80-130 bps) cumulatively over the next two years as a result of the COVID-19 pandemic.
  • 1Q20 interim dividend at S$0.33 per share was maintained from the previous quarter. We expect annual dividends of S$1.32, a yield of 6.4% for DBS based on our TP.
  • Maintain ACCUMULATE with a downward revision in TP to S$20.60. Our FY20e earnings estimate was revised downwards by 33% after raising provision by $700mn per quarter over the next 5 quarters and compressing NIM by 10 bps.



The Positives

+ Record PPOP of $2.48bn provides buffer amidst trying operating environment. Total income crossed record $4bn mark (+13.4% YoY) as cost discipline was maintained (+3.9% YoY) to provide a positive JAW of 9%. CIR improved to 38.6% in 1Q20 (1Q20: 42.2%).

Income was buoyed by robust growth across all segments. In particular non-interest income benefitted the most (+39.3% YoY) as investment gains were realised on fixed income assets during the quarter.

Fee income enjoyed strong growth (+14% YoY) from WM fees (+28% YoY), loan-related fees (+17% YoY) as well as investment banking fees (+64% YoY).

NII grew 7.4% YoY on relatively stable NIM (1Q20: 1.86% vs. 1Q19: 1.88%) and loans growth of 4% YoY as translation effect of interest rate cuts on NIM was muted in the first quarter.

Strong operating results in 1Q20 is expected to hold up FY20 income levels similar to FY19 levels as business slows in subsequent quarters. This means the bank expects income gain of $500mn in 1Q20 YoY to be offset by lower income across the subsequent three quarters of FY20.


+ Interim quarterly dividends maintained at of 33 cents, providing an annualised yield of 6.6%.  The bank expects current levels of dividend to be sustainable unless CET-1 levels fall drastically below the targeted operating range of 12.5 – 13.5%. Current CET-1 level maintains at 13.9%, little changed from a year ago (1Q19: 14.1%). DBS added that dividend is guided by stability rather than a targeted payout ratio.


The Negatives

– Allowances put a huge dent on earnings. In anticipation of the impact from the pandemic, DBS has set aside $1.09bn in 1Q20 as allowances. Of which, $706mn was booked as GP as economic conditions continue deteriorating. This was a stark contrast from a year ago, when DBS wrote-back $100mn in GP on upgrades and recoveries. The remaining amount was charged to SP, largely attributed to new account in the O&G sector identified in the quarter. We believe around S$200mn (or “more than half”) of specific allowances were made on a notable oil trader.

Exposure to the O&G sector maintained at $23bn, roughly 6% of loan book. However, exposure to traders within the sector, who are at risk from the oil price crisis stands at $5bn, lower than 2% of overall loan exposure.



Downward NIM pressure to kick in in subsequent quarters. Resilience in NIM in 1Q20 was not reflective of NIM pressure ahead as LIBOR held up due to stressed funding conditions. We have reduced FY20 NIM forecast by 10 bps to incorporate the lower interest rate cuts environment. Conversely, DBS mentioned there is pricing power by increasing spreads especially when competing banks start to withdraw their loans.


Credit costs to increase by 80-130 bps cumulatively over the next 2 years, amounting to $3bn-5bn in additional allowances to be booked. We have included an additional $3bn on top of the $1.09 booked in 1Q20 in our estimates, putting allowance at around $700mn per quarter for the next 4 quarters.  


Sufficient capital to ride through this downturn. CET1 is 13.9% Currently, cumulative GP stands at $3.2bn, including management overlays of around $1bn. The bank’s various capital and liquidity positions also maintain well above regulatory requirements. For more information, please refer to Annex A.


Investment Actions

We maintain our ACCUMULATE recommendation with a lowered TP of S$20.60 (previously $27.30). We have revised the model by considering the expected allowances of $700mn per quarter to be booked over the next four quarters and further reducing NIM by 10 bps as translation effect from the interest rate cuts in March.


Annex A: DBS has sufficient buffer vs. Regulatory Capital Requirements

Source: DBS, MAS, PSR

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