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Simons Trading Research

Author: simonsg   |   Latest post: Mon, 30 Mar 2020, 8:48 AM

 

DBS Group - Hunker Down Due to Outbreak of COVID-19

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  • DBS posted a good set of results with net profit increasing 14% y-o-y and growth from wealth management and investment banking.
  • Management estimated the negative impact from the outbreak of COVID-19 at around 1-2% of revenue and additional specific provisions of 4-5bp.
  • DBS aims to provide sustainable dividends and has increased final dividend by 10% q-o-q to 33 S cents. Full-year 2020F DPS of S$1.32 represents a dividend yield of 5.2%.

Dbs Results

  • DBS (SGX:D05) reported net profit of S$1,508m (+14% y-o-y), above our expectations of S$1,406m.

Growth driven by overseas markets.

  • Loan growth was moderate at 3.7% y-o-y and 1.1% q-o-q. Corporate loans and trade loans expanded S$3b and S$4b q-o-q respectively. Housing loans grew marginally after contracting for three quarters. Loans to Rest of The World expanded 8.8% q-o-q. DBS appears to have trimmed exposures to Hong Kong (-3.6% q-o-q) and manufacturing (-5.4% q-o-q).
  • NIM narrowed 1bp y-o-y and 4bp q-o-q to 1.86% due to lower interest rates in Singapore and Hong Kong. Net interest income increased 4% y-o-y.
  • Fees grew 17% y-o-y driven by wealth management (+31% y-o-y). AUM grew 11% y-o-y to S$245b. Contribution from investment banking grew 176% y-o-y and 45% q-o-q (series of private placement and rights issues and mergers among S-REITs).
  • Net trading income was seasonally softer at S$228m (flat y-o-y but down 47% q-o-q).

Asset quality stable.

  • NPL balance decreased 2.7% q-o-q and NPL ratio was unchanged at 1.5%. Provisions dropped 40% y-o-y as DBS wrote back general provisions of S$77m (reclassification from general provisions to specific provisions). New NPL of S$575m was due to a property company in Singapore (fully secured, did not default but breached debt covenants).
  • DBS also wrote-off S$419m of legacy NPLs.
  • DBS aims to provide sustainable dividends that rises progressively. The board has recommended final dividend of 33 S cents, up 10% q-o-q.

Stock Impact

In contingency mode.

  • DBS has implemented "split teams" and "work from home" (one-third of staff in Singapore and Hong Kong is working from home and two thirds in China). There is minimal service disruption, thanks to investments in digital capabilities made over the years. A case to point, DBS was able to complete private placement for Prime US REIT (SGX:OXMU) despite many staff working from home.
  • DBS places priority on staff welfare. It has distributed personal health equipment, such as face masks, sanitisers and thermometers, to its staff.

Liquidity relief for customers.

  • DBS will provide a six-month moratorium on principal repayment for customers with good credit records:
    1. SME property loans in Singapore and Hong Kong.
    2. Mortgage loans for retail customers in Singapore.
  • These measures extend the maturity of loans but do not have an impact on earnings.

Impact from outbreak of COVID-19.

  • Assuming the outbreak of COVID-19 is controlled by summer, management estimates the negative impact on revenue at around 1-2% (management expects negative impact to last one quarter, which is similar to the outbreak of SARS). Specific provisions could increase by a few basis points (base case: 4-5bp). DBS has built sufficient general provisions to guard against the negative impact from the trade conflict between the US and China and social unrest in Hong Kong during 9M19, which provides a cushion.
  • Management sees two clusters of companies affected by outbreak of COVID-19:
    1. Manufacturing supply chain, such as auto, electronics and etc. These companies will face tightness in liquidity and operate at low capacity utilisation for 3-4 months. However, they will bounce back as demand is not displaced.
    2. Consumer Services, such as tourism, hotels, retail, aviation and etc. Demand is displaced and revenue is lost. Management estimates exposure to these companies at S$20b. Large corporations, such as Genting, Shangri-La and Singapore Airlines, accounted for 90% of its exposure in this space. The remaining 10% or S$2b of these accounts are under stress and vulnerable.

Anticipate NIM compression for 2020.

  • Management guided on mid-single-digit loan growth of 4% and NIM compression by 7bp for 2020.

Earnings Revision/ Valuation

  • Maintain BUY. Our target price of SGD28.00 is based on 1.39x 2020F P/B, derived from Gordon Growth model (ROE: 11.8%, COE: 8.5% (beta: 1.3x), Growth: 0.0%).
  • We trimmed our 2020 net profit forecast by 2.2% to S$5,913m due to slower estimated growth in fees and commissions of 3.7% (previous: 8.4%). Fees wealth management and credit cards are likely to be affected by the outbreak of COVID-19.

Source: UOB Kay Hian Research - 14 Feb 2020

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