+ NIM expanded 5 bps YoY and 1 bps QoQ to 1.88%, the highest since 2Q10. NIM expansion was boosted by higher interest rates in Singapore and Hong Kong. Fixed deposits grew 16.7% YoY, faster than CASA deposits which contracted 2.2% YoY. It resulted in a rise of 44 bps YoY (4Q18: 46 bps YoY) in the cost of deposits, faster than assets yield which rose 48 bps YoY (4Q18: 59 bps). Around 40-45% of the loans book reprices almost immediately, with the remaining fixed rate loans to be repriced over time in the next two to three years. Hence there is a lag effect from the rise in interest rates on the loan book. We expect a couple more quarters of margin expansion. By blending in the effects of rising cost of funds and the lagged effect of loan repricing, guidance was maintained at 5bps above FY18’s average NIM of 1.85%. We pen in our estimate for FY19e NIM at 1.91%.
+ Allowances declined 53.7% YoY due to a write-back of S$100mn and improvements in credit environment. With the stabilisation of interest rates and receding trade war fears, DBS adjusted its ECL model accordingly on a monthly basis. The exceptionally high ROE of 14% is unusual due to trading gains and general provision write-back.
+ Non-interest income recovered with the 4.7% YoY rise in other non-interest income offsetting the fall of 1.9% YoY in fee income. An aggregated fall of 12.4% from investment banking, brokerage and wealth management fees was partially offset by a 12.0% rise in card, transaction and loan-related fees. The fall in fees was attributable to a more positive sensitive in capital markets a year ago. Other non-interest income rose on higher trading income from gains in interest rates and credit activities, as well as higher gains from investment securities. It offset the one-off property gain of S$84mn in 1Q18. Excluding the one-off property gain, other non-interest income grew 27.1% YoY.
+ Housing loans contracted (-0.76% QoQ) for the first time in more than a decade. The decelerating mortgage loan growth is due to property cooling measures and high-interest rates. DBS’s market share of Singapore housing loan remained unchanged at 31%. However, overall loans growth remained stable at mid-single digit of 5.7% YoY, led by regional broad-based non-trade corporate loans (+11% YoY). We believe that the slowdown in mortgage loans will persist. Hence we tone down our FY19e loans growth estimates from 6.0% to 5.4% YoY.
Change in dividend policy. Dividend payment frequency has been changed to four times a year instead of two. 1Q19 proposed dividend of 30 cents per share, consistent with FY18 full year pay-out of S$1.20 per share. DBS remains committed to increasing dividends on a sustainable basis. Quarterly dividend payments provide shareholders with more regular income stream as well as some consistency in DBS’ Capital Adequacy Ratio.
Figure 1: DBS FY19e guidance vs. PSR estimates
We downgrade to Accumulate at an unchanged target price of S$29.00. Our rating has been downgraded to Accumulate due to the share price performance.
Despite the softer expectation of loans growth due to market headwinds, we expect a couple more quarters of NIM expansion due to loan repricing. Looking forward, asset quality is expected to be stable, and greater cost efficiencies will provide upside to earnings. DBS remains attractive with FY19e dividend yield of 4.2%.
Valuation: Gordon Growth Model
NIM expansion of 5 bps YoY and stable loan growth of 5.7% YoY supported Net Interest Income growth.
Brokerage, investment banking and wealth management services contracted 12.4% YoY due to positive market sentiments a year ago.
Card fees surged 21.1% YoY due to higher transactions.
Gain on investment securities and Trading income gains from interest gains and credit activities, more than offsets the one-off property disposal gain of S$84mn.
Loans growth was driven by broad-based regional non-trade corporate loans and consumer loans. Mortgage loans contracted for the first time in more than a decade due to high interest rates and property cooling measures.