Simons Trading Research

Author: simonsg   |   Latest post: Tue, 16 Jul 2019, 2:53 PM


DBS Group - 4Q18 Results Preview ~ to Deliver Good Results Despite Headwinds

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  • We forecast net profit of S$1,289m for 4Q18, down 8.8% q-o-q but up 8.0% y-o-y. We expect double-digit growth in net interest income of 10.1% y-o-y, which offsets the decline in contributions from wealth management fees (-3.1% y-o-y) and net trading income (-47.4% y-o-y).
  • DBS provides an attractive dividend yield of 5.0% based on a DPS of S$1.20 for 2019.
  • Maintain BUY with an unchanged target price at S$28.50.

What’s New

Moderation in loan growth in 2H18.

  • We expect loan growth of 1.2% q-o-q and 6.6% y-o-y in 4Q18, in line with toned down guidance of 6-7% for the full year of 2018. Loan growth on a y-o-y basis moderated by 1.6ppt q-o-q to 6.6% due to a high base with loans expanding 2.8% q-o-q in 4Q17.
  • DBS GROUP HOLDINGS LTD (SGX:D05) achieved healthy loan growth, driven by non-trade corporate loans. However, consumer loans were flat q-o-q while trade loans continued to contract q-o-q, although at smaller magnitude compared to 3Q18.

NIM expansion sustained.

  • We expect continued but gradual NIM expansion of 1bp q-o-q to 1.87% in 4Q18 due to DBS’ strong deposit franchise for the Singapore dollar. On a y-o-y basis, NIM expanded by a significant 9bp, which generated healthy double-digit growth for net interest income of 10.1% y-o-y to S$2,308m.

Wealth management fees suffer from risk-off flight.

  • We expect fees to have contracted 9.7% q-o-q and 1.3% y-o-y to S$627m. Market sentiment weakened after the US imposed tariffs on US$200b of exports from China.
  • High net worth clients turned more risk averse, resulting in a significant decline in wealth management fees (-3.1% y-o-y and -24.7% q-o-q). Contribution from investment banking fees was also lacklustre.
  • Healthy growth from loans-related fees (+6.0% y-o-y) and credit cards (+25.8% y-o-y) could not offset the steep decline in wealth management fees.

Whipsawed by unexpected shift in yield curve.

  • We expect net trading income to have dropped 47.4% y-o-y to S$120m due to losses from gapping (unexpected inversion at short-end of yield curve). 4Q18 was a difficult quarter with many global banks reporting trading losses due to widening of credit spreads.

Maintaining cost efficiency.

  • We expect cost-to-income ratio (CIR) to deteriorate by 0.2ppt to 44.1% for 4Q18. We expect CIR to come in at 43.6% for the full year of 2018.

Asset quality still benign.

  • NPL formation and credit costs are expected to be similar to levels seen in 3Q18. We expect specific provisions to be at 25bp (3Q18: 27bp), at the higher end of the guided range of 20-25bp, given the deterioration in the macro outlook.
  • We expect NPL ratio to have remained relatively unchanged at 1.55% as NPL formation remains benign.

Stock Impact

Delivering good results despite headwinds.

  • We forecast net profit of S$1,289m for 4Q18, down 8.8% q-o-q but up 8.0% y-o-y. Double-digit y-o-y growth in net interest income offset the decline in contributions from wealth management fees and net trading income.

Evolving into yield play.

  • DBS provides an attractive dividend yield of 5.0% based on DPS of S$1.20 for 2019F.

Earnings Revision / Risk

  • We have kept our existing earnings forecasts relatively unchanged.

Valuation / Recommendation

Maintain BUY.

  • Our target price for DBS of S$28.50 is based on 1.49x 2019F P/B, which is derived from the Gordon Growth Model (ROE: 12.2%, COE: 8.5% (Beta: 1.15x) and Growth: 1.0%).

Share Price Catalyst

  • NIM expansion from higher interest rates in Singapore and Hong Kong.
  • Improvement in cost/income ratio due to digitalisation and strategic cost management initiatives.
  • Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan, including initiatives in digital banking.

Source: UOB Kay Hian Research - 07 Feb 2019

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