DBS Group Holdings Ltd – Recovery underway as allowances tapered off November 9, 2020 332

PSR Recommendation: NEUTRAL Status: Maintained
Last Close Price: S$27.1 Target Price: S$22.60
  • 3Q20 earnings of S$1,297mn brought 9M profit to S$3.7bn. At 79% of our FY21e estimate, results were in line with consensus as well, with allowances lower than expected.
  • NII fell 12% YoY as NIM was down 37bps to 1.53%. Weakness could sustain into 4Q20.
  • Fees and commissions were up 17% QoQ on recovery in wealth-management and credit-card fees.
  • Maintained 18-cent quarterly dividend. Scrip dividend will also be available for 3Q20.
  • Maintain NEUTRAL with higher GGM TP of S$22.60, from S$21.00. No change to earnings estimates but we peg our valuation at a higher 1.26x FY21e P/BV on lower allowances from a better credit outlook. For sector exposure, prefer UOB (SGX: U11, Accumulate, TP: S$21.10).



The Positives

+ Recovery in non-interest income

Fees and commissions were down 2% YoY from S$814mn to S$798mn but up 17% QoQ as wealth-management and credit-card fees recovered. Wealth-management fees grew 25% QoQ and 6% YoY, a strong recovery. Credit-card fees of S$160mn were up 22% QoQ, though still down 20% YoY as consumer spending on big tickets such as travel remained subdued.

Trading income grew 11% YoY to S$608mn as the bank continued to realise profits on investment securities. QoQ, it was down 18% from a high base. Altogether, non-interest income offset the weakness in NII.

+ Allowances tapering off

Allowances of S$554mn were 35% lower than the S$849mn recorded in 2Q20. They are expected to stabilise as the bank comes off front-loaded provisions of S$1.94bn in 1H20. This is expected to lift pressure on profits in subsequent quarters.


The Negatives

– NII fell 12% YoY as NIM was compressed 37bps to 1.53%

NIM further tightened 9bps QoQ from 1.62% to 1.53%, chipping NII by 6%. The low NIM was a result of low interest rates, loan contraction of 1% and an increase in deposits of 1%.



Asia embarks on swift recovery

The bank expects a strong economic rebound in Asia in 2021 to support mid-single-digit loan growth in FY21. However, as Singapore loan growth remains tepid, we are hesitant to revise our loan-growth assumptions of 2-3%. A strong fee-income recovery to pre-COVID level is expected to support its income recovery in 2021.


Investment Action

Maintain NEUTRAL with higher target price of S$22.60, up from S$21.00

We hold our FY21e earnings estimate and peg our GGM valuation to a higher FY21e ROE of 11.4%. The higher ROE comes from improved income and lower allowances that are expected to increase profits by 16% in FY21e. 

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About the author

Profile photo of Tay Wee Kuang

Tay Wee Kuang
Research Analyst
Phillip Securities Research

Wee Kuang currently covers the Banking and Finance as well as the Healthcare sector. Wee Kuang has had 2 years of experience as a Trading Representative (TR) before his current stint as an Analyst. As a TR, Wee Kuang developed a keen interest in investor education and hopes to be able to provide better insights for investors in his current role.

Wee Kuang graduated with a Bachelor of Business Management (Cum Laude) with major in Finance and Operations Management in 2017.

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