DBS Group Holdings Ltd – Emerging stronger August 6, 2021 253

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: 32.00
  • 2Q21 earnings 10.7% above our 2Q21e forecast. The outperformance came from net fee income and S$85mn reversal in GPs.
  • Asset quality stable, resulting in further GP write-backs of S$85mn. Management lowered full-year total allowances to under S$0.5bn (1H21 allowances at S$89mn). FY21 credit cost likely to be under 20bps.
  • Broad based loan growth of 3% in 2Q21 and 6% in 1H21.
  • NIMs retreated 4bps QoQ to 145bps. Full year guidance now at lower-end of guidance.
  • Maintain ACCUMULATE with higher GGM TP of S$32.00, from S$31.40. We raise FY21e earnings by 6.7% as we lower our allowances. We now assume 1.39x FY21e P/BV in our GGM valuation, up from 1.36x, as we raise ROE modestly to 10.6%. Catalysts expected from declaration of special dividend.

 

The Positives

+ 2Q21 earnings exceeded forecast. All fees rose by double digits from a year ago. WM  fees rose 31.5% as investment-product sales were boosted by an improving economy amid low interest rates.

+ Asset quality stable, resulting in further GP write-backs of S$85mn. Repayment by weaker exposures and credit upgrades allowed DBS to write back GPs during the quarter. The bank also made SPs of S$164mn, for the automotive and building and construction sectors. It lowered full-year allowances to under S$0.5bn (1H21: S$89mn) with credit cost likely to be under 20bps. We believe full-year allowances will come under this guidance because of the Group’s asset quality. In light of its recent GP write-back, we cut total provisions for FY21e to S$309mn from S$772mn.

+ Broad-based loan growth of 3% in 2Q21, 6% in 1H21. Loan growth was led by trade and non-trade corporate loans. Housing and WM loan growth was sustained at the previous quarter’s levels.

 

The Negative

– NIMs declined 4bps QoQ to 145bps; full-year guidance now at lower end of range. Increased deployment of surplus deposits at lower yields dragged NIMs down as deposits grew 1% QoQ. NII retreated 1% QoQ to S$2.1bn as lower NIMs offset higher loan and deposit volumes. Management now expects FY21 NIMs to fall at the lower end of its guided range of 145-150bps.

Outlook

Business momentum strong

Despite economic uncertainties from Singapore’s return to Phase 2 (Heightened Alert),   loans and transaction pipelines are expected to be strong. We lower allowance estimates for FY21e. Consequently, our earnings for FY21e rise by 6.7%.

New initiatives expected to power growth

DBS is accelerating new initiatives as it faces interest-rate headwinds. New initiatives such as the DBS Digital Exchange, Partior, Climate Impact X and China Securities joint venture are expected to bring in revenue of S$350mn in FY22e, up from S$150mn in FY21e.

GP reserves sufficient

With its capital position and liquidity – CET-1 ratio of 17.5% in 2Q21 vs. 16.6% last year – well above regulatory requirements and high allowance reserves, we believe the bank has sufficient provisions to ride out current economic uncertainties. 2Q21 DPS is 33 cents, back to pre-pandemic levels. We do not rule out special dividends.

Investment Action

Maintain ACCUMULATE with higher target price of S$32.00, up from S$31.40

We raise FY21e earnings by 6.7% as we lower allowances estimates for FY21e. We now assume 1.39x FY21e P/BV in our GGM valuation, up from 1.36x, as we raise our ROE estimates modestly to 10.6%.

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About the author

Profile photo of Terence Chua

Terence Chua
Senior Research Analyst
Phillip Securities Research

Terence specialises in the consumer, conglomerate and industrials sector. He has over five years of experience as an analyst in the buy- and sell-side. As an institutional fund management analyst, he sat on the China-Hong Kong desk. Terence was ranked top 3 for Best Analyst under the small caps and energy category in the Asia Money poll 2018.

He graduated from the Singapore Management University with a major in Finance (Honours), and is the honoured recipient of the CFA scholarship.

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