Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM


DBS Group - Resilient, But Not Immune; Downgrade to HOLD

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Structural Changes Can’t Fully Blunt Macro Headwinds

  • DBS (SGX:D05)’s 1H19 core earnings were in line with MKE, but ahead of Street.
  • NIMs expanded, fee income widened and costs fell. Together these delivered a 17% y-o-y expansion in 2Q19 core earnings. This testifies to its post-GFC structural evolution from a trading-oriented universal bank to a less cyclical commercial bank. Yet 2Q19 total NPLs increased 3.3% y-o-y – the fastest since 3Q17 – pointing to trade war-related macro headwinds, particularly in Singapore, HK/China & SE Asia.
  • With increased uncertainty from slower economic growth, potential rate cuts and souring asset quality, we lowered 2019E-2021E earnings by 5-7%. Our multi-stage DDM target price has been lowered from SGD29.46 to SGD28.05.
  • DBS share price has risen 13% YTD. With just 4% upside, downgrade to HOLD.

Higher Asset-quality Risks Going Forward

  • While DBS's 2Q19 NPL ratio fell 10bps y-o-y to 1.5%, we note a 2.5x q-o-q increase in new NPL formation. Bad loans in sectors such as manufacturing (+11% y-o-y), building & construction (+10%) and general commerce (+10%) saw notable advances.
  • Given MKE Economics team’s trade war-related bearish outlook for the region, particularly recession fears in Singapore, as well as uncertainty in HK/China, we raised 2019E- 2020E provisioning costs by 38-50%. This puts average credit charges for this period (30bps vs. 20bps earlier) close to the past 5-year cycle.

Operationally sound, but headwinds ahead

  • DBS's reported 2Q19 NIMs expanded 6bps from mortgage repricing and better deposit costs management. Management expects margins to continue to see improvement in 2H19, albeit at a slower pace.
  • Loans expanded 4% y-o-y despite mortgages coming in flat y-o-y. While 2Q19 mortgage bookings are up 60% y-o-y, implying downside support from drawdowns going forward, we have lowered 2019E-2021E loan growth assumptions by 160-190bps to take in to account the macro slowdown.
  • Potential Fed rate cuts have us lowering NIMs by 2-10bps for the same period.

Target Price lowered to SGD28.05. Downgrade to HOLD

  • Our forecast changes results in 5-7% lower core earnings for 2019E- 2021E. As a result, we cut our multi-stage DDM target price (COE 10.3%, 3% terminal) 5% to SGD28.05.
  • With 4% upside, we downgrade DBS to HOLD.

Source: Maybank Kim Eng Research - 29 Jul 2019

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