What is the news?

DBS reported 2Q13 net profit attributable to shareholders of S$887 million. Net profit was higher 9.5% y-y, but lower q-q by 6.6% from an exceptionally high base. This was 4% higher than our expectations, due to higher net trading income. Loan allowances were however higher than expected as credit cost normalizes. Management highlighted its broad based growth, including record earnings for its SME business and Hong Kong operations.

How do we view this?

Management maintained guidance for NIMs to be stable, while Loans growth guidance was further increased to mid double digit. Credit cost would however be potentially higher as it normalizes to historical levels. We are positive on the continued healthy loans growth, strong performance in the Fees and Commission, and higher trading income from customer flows. While Loans allowances are expected to remain at current higher levels, we do not see any cause for concern. Specific provisions are expected to be higher as NPLs increase from a low base.

Investment Actions?

We adjust our earnings forecast, factoring in 2Q13’s earnings, and our forecast of higher fees and commission, net trading income and higher credit cost. Earnings growth has been resilient despite current economic uncertainty. Earnings could also significantly increase when interest rates increase to normalized levels. We therefore maintain our “Accumulate” rating, with a higher TP of S$17.50, based on higher P/B of 1.28X due to its strong performance.

Source: PhillipCapital Research - 2 Aug 2013