Upgrade to BUY. DBS’ 3Q12 net profit of SGD856m (+6% QoQ, +12% YoY) was above expectations, but largely on account of low credit costs. Positive operationally is that NIMs are likely to stabilize moving forward in our view, while loan momentum will likely sustain, albeit at a slower pace. Moreover, there has been a steady build-up in noninterest income to support earnings expansion. Share price has slipped 8% and valuations are decent at a prospective 2013 P/B of 1x. Our call is upgraded to a BUY with a raised TP of SGD16.10 on a higher 2013 P/B multiple of 1.2x (in line with peers) from 1.05x previously to reflect the more stable outlook (prospective 2013 ROAE of 11.1x).

Loan growth to sustain. Though loan growth contracted 1% QoQ due to bulk maturities on its China trade financing loans, management sees healthy replenishment of such loans. Corporate loan demand in Singapore remains buoyant, supporting loan growth of 12% annualized. We have trimmed estimates but project stable growth of 8% this year and next, versus management’s guidance of 9-10%.

Expect stable NIMs. The 5 bps QOQ NIM compression in 3Q to 1.67% was less a function of higher funding costs but lower yields because of margin compression in China. Nevertheless with a loan/deposit ratio of 84%, there is the ability to leverage up while management sees room for improved pricing in eg the SME segment and in Hong Kong. We do, as such, expect NIMs to stabilize into 2013, as does management.

Building diversified income channels. Augmenting income is the group’s steady build-up in non-interest income, with 9M12 wealth management and global transaction services income up a solid 33% and 44% YoY. Moreover, DBS remains a dominant player in the bond market, with revenue from fixed income activities up 83% YoY.

Room for further capital strengthening. Risk-weighted assets (RWA) declined SGD8b QoQ, further improving capital ratios end-Sep (core Tier 1 of 11.6%). Management is confident of further improvements in capital structure to drive RWA down further. Moreover, AFS investment surplus of SGD600m could add another 0.4%-pts, we estimate.

Source: Maybank Kim Eng Research - 02 Nov 2012