DBS Group Holdings Ltd – Record earnings on robust growth February 17, 2020 1274

PSR Recommendation: ACCUMULATE Status: Maintained
Last Close Price: S$30.79 Target Price: S$27.3
  • 4Q19 net profit of S$1,518mn beat expectations (+15%) with other expenses and allowances coming in 10% and 57% below expectations, bringing FY19 net profit results ahead of our full-year estimates by 5%.
  • FY19 net profit grew 14% YoY led by strong fee income from wealth management and investment banking and lower allowances.
  • NIM compressed 4 bps in the quarter, with resilience showing through lowering of funding costs.
  • Loans grew 2% QoQ but continue showing weakness despite a turnaround in housing loans growth after shrinking for 3 straight quarters.
  • Credit deterioration risk as a result of the Covid-19 outbreak on credit quality for FY20 will be cushioned by the bank’s current general provisions levels.
  • Proposed final dividend of S$0.33 per share, bringing the full-year dividend to S$1.23 per share for FY19 (+2.5% YoY).
  • Maintain ACCUMULATE at an unchanged target price of S$27.30.


The Positives

+ 4Q total income grew 7% YoY with robust growth across all sources. Fee income was the main driver of income growth, posting a +17% increase YoY for the quarter. Strong fee income was due to investment banking fees almost tripling to S$80mn from S$29mn from a year ago, as well as higher wealth management fees recorded as a result of buoyant market sentiments (+31% YoY). NII grew a modest 4% YoY from higher asset volumes and a stable NIM (1.86%), while other non-interest income rose 5% as a result of higher gains on investment securities.

+ Asset quality remains healthy. Allowances fell 41% YoY due to a $77mn write-back of GP and a lower SP, contributing to the 14% growth in 4Q net profit YoY. NPA also declined 3% from the previous quarter as write-offs and recoveries outpaced new NPA formation. The NPL rate remains low at 1.5%, while SPs remain as 21 bps of loans, unchanged from 3Q.

+ Proposed quarterly dividends of 33 cents, which will lead to an annualised dividend of $1.32 per share, a 10% increase from 3Q19. The management believes the increased dividend payout is sustainable given the earnings growth that the bank has experienced.


The Negatives

– NIM compressed by 4 bps QoQ. Following the third interest rate cut in October, DBS’ NIM continues facing downward pressure. Asset yield fell 16 bps in 4Q while the bank managed to reduce funding costs by 13 bps. NIM is expected to face pressure in FY20e under the low interest rate environment weighing on SIBOR. However, the pause in rate cuts by the Federal Reserve may provide some respite to NIM expectations in FY20e. DBS has previously guided NIM to compress by 7 bps in FY20, while we estimate NIM to fall to 1.81% for FY20e.

Loans growth continues softening to 3.66% YoY. Across industries, gross loans were heavily supported by growth in the ‘building and construction’ as well as ‘professionals & private individuals’ industries. Loans in both industries achieved double-digit growth (11% and 12% respectively) YoY. Other industries remained mostly flat. Housing loans started to pick up, growing by +0.4% QoQ after shrinking for the first 3 quarters of FY19.



Macroeconomic uncertainty lingers. Despite positivity coming off a partial trade deal between the US and China, global economic growth continues to face headwinds. On top of a slowing economy, the Covid-19 outbreak has already disrupted the global manufacturing supply chain with China at the epicentre of the outbreak. Singapore also faces challenges across the tourism and aviation industry which can prove to be a drag on the economy.

Negative impact of Covid-19 on earnings and allowances. With the threat of the Covid-19 rampant, we might see asset quality deteriorate. The management is expecting a 1-2% point impact on total revenue for FY20 and a 3-4 bps increase in SP which should be catered for by current GP levels. However, if the virus outbreak worsens, the loan book could come under additional stress.

Loans growth expected to remain soft. Business sentiments might take a hit from the poorer economic outlook which can further impede a weak trade-related loans growth.


Investment Actions

We maintain our ACCUMULATE recommendation with an unchanged target price of S$27.30. The revised dividend will provide investors with an attractive yield despite short-term uncertainties. There are no changes to our FY20e forecasts.

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