DBS Group Holdings Ltd: ROE at multi-year highs May 2, 2018 776

PSR Recommendation: ACCUMULATE Status: Downgraded
Target Price: SGD32.70
  • 1Q18 PATMI was in-line with expectations (after excluding S$86mn disposal gain)
  • The standout performers were group NIMs, wealth management and Hong Kong
  • Growth momentum in NII provides sustainability and visibility in earnings. ROE was 12.5% excluding disposal gain.
  • We raised our target price to S$32.70 (previously S$29.30). Our rating has been downgraded to ACCUMULATE due to the share price performance.


The Positives

+ Net interest margins (NIM) at almost two-year highs. NIM touched 1.83%, the highest in seven quarters. Around 1/3 (or S$119mn) of the improvement in NII came from increased margins. Every 1 basis point rise in NIM, translates into $8mn in net income. Guidance is for FY18e NIMs to rise by 100 bps to 1.85% (Figure 1).

+ Hong Kong earnings surged 66% YoY in 1Q18. Net profit for Hong Kong jumped 66% to S$350mn. Interest and fee income increased 14% while operating expenses stayed flat and there was a write-back in provisions.  Hong Kong now accounts for almost 30% of group profits. Hong Kong has built up CASA deposit base over the past few years from ~30% to 63% on account of their attractive cash management solution to mainland based clients.

+ Asset quality benign. New NPA formation in 1Q18 was S$195mn. This is the lowest in four years. There were no meaningful specific provisions on the new NPAs. Credit cost is 20 bps this quarter against 25-30ps guidance.

The Negatives

– Only investment income missed the mark. Income from investment securities tends to generate income of S$100mn per quarter. This fell to S$22mn in 1Q18. Part of the reason was due to a reclassification of only debt securities. Another reason we believe, is the overall weak bond market performance. Picking up the slack in this other non-interest income category was a rebound in net trading income to S$368mn (1Q17: S$270mn).

– Possible flip-side in higher interest. Not a concern at the moment but rising interest rates has the secondary effect of creating stress on borrowers. SME and consumer loan book will be the most vulnerable depending on the speed interest rate ascends. DBS did emphasize that the mortgagers are assessed using 3.5% interest rate assumption. Furthermore, historically, housing loan asset quality has limited impact when rates rise. The more obvious driver of housing loan asset quality will be employment.

– Singapore provisions still sticky. Whilst group provisions were lower than our forecast, Singapore provisions was S$125mn, just marginally below 1Q17 provisions of S$140mn. We are assuming DBS took a more aggressive stage 2 provisioning under the new SFRS (I) 9. Stage 2 requires the recognition of credit loss over remaining life of the loan.


There are multiple drivers to 2018 growth. Firstly, margin expansion from rising SIBOR, SOR and HIBOR. Secondly, volume growth as overall economy improves. Hong Kong loans growth has been stellar and Singapore housing loans will be supported by the surge in transaction volume. Thirdly, asset quality is benign and we expect around an S$1bn reversal in provisions. Fourthly, wealth management is enjoying structural growth as DBS builds a stronger franchise and platform.

Figure 1: DBS guidance vs. PSR estimates


Investment Actions

We raised our target price to S$32.70 (previously S$29.30). Our rating has been downgraded to ACCUMULATE due to the share price performance. Our target was raised on the back of higher terminal growth rate and a modest upward revision to our ROE.

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