• 4Q17 PATMI of S$1.2bn was in line with our estimates.
• Loan volume, NIMs, loans quality and Non-II results were stellar.
• Strong momentum in Consumer and SME banking segment in Hong Kong and Singapore.
• Strong momentum in WM and IB fee income.
• Maintain BUY rating with unchanged target price of S$29.30

The Positives

+ Stronger NII is driven by strong broad-based loans growth and higher yields. Loans growth was c.7% higher YoY as housing loans continued the strong QoQ growth momentum. DBS share of Singapore mortgage loans edged higher to 30.8% from 28.7% in June 2017. Rates and volume growth for trade assets was robust helped by the strengthening of RMB.

+ Consumer and SME banking in Singapore and Hong Kong gained momentum. 4Q17 WM income was S$534mn (+26.5% YoY) but was 2.2% lower QoQ due to a seasonally weak 4Q. 4Q17 Retail income growth was flat YoY but grew 5.7% QoQ following a generally weak performance from 1Q17 through to 3Q17. SME banking was a bright spot, growing 16.2% YoY and 2.8% QoQ on the strong business expectations and PMI reading in Singapore and continued strength in Chinese consumer sentiment.

+ Provision expense has normalised after the major clean-up in 3Q17. The normalisation of the provision expense in 4Q17 was a pleasant surprise as we had expected a carryover of higher provision expense from the 3Q17 clean-up. We believe the normalisation is an indication that the clean-up in 3Q17 was sufficient to clear the path a stronger asset quality performance in 2018.

+ Annual dividend per share will double in 2018 from the pay-out in 2016! The final one-tier tax exempt dividend was increased to S$0.60 per share from S$0.30 per share in 2016. In addition, a special dividend of S$0.50 per share was also announced. Barring any unforeseen circumstances, the proposed annual dividend moving ahead will be raised to S$1.20 per share, double the annual rate of S$0.60 per share in 2016. The S$1.20 per share dividend represents a c.50% dividend pay-out ratio based on FY18e earnings and a dividend yield of c.4.5% at current share price.     

The Negatives

– CIR expected to be stable at 43%. We had expected CIR to improve slightly in FY18. However, management has guided it to be stable at 43% in FY18. This is due to the integration of Indonesia and Taiwan markets from the ANZ acquisition. Indonesia and Taiwan businesses’ CIR is between 60% and 80%. Excluding these 2 businesses, CIR would have been 42.5%.

Outlook

In FY18, we expect NIM to be c.1.87% and loans growth to be between 7% and 8%. Given those assumptions, we can expect total income to grow 10%. We expect full year total credit cost to be 26bps and CIR to be 43%.

Valuation: Gordon Growth Model

3-Year Historical Price-to-Book