3Q13 in line; reiterate BUY. DBS’ 3Q13 results were in-line with market expectations. While the underlying fundamentals remained sound, the operating trends were mixed, characterized by robust loan growth (+3.0% QoQ, +19.4% YoY), a 2bp QoQ, or 7bp YoY compression in net interest margin (NIM) and benign credit quality. The results were somewhat affected by weakness in treasury income brought about by strategies taken in anticipation of taper by the Federal Reserve. Our TP of SGD20 is based on 1.3x FY14 P/BV.

3Q13 net profit of SGD862m (-3% QoQ; +1% YoY) saw lower contribution from the treasury desk, as a result of the move to shorten the duration of its fixed income portfolios and hedge its long-term bonds. On a positive note, customer-related treasury flows remained firm and accounted for close to 50% of total treasury income.

Strong loan growth offset further NIM contraction. Management maintains its loan growth target of 15% for the year. One-third of this growth was driven by trade loans. Management expects a slower loan growth of 8-10% on slower SGD housing loan growth (applications fell 30% post implementation of total debt servicing ratio framework). The pace of growth for FY14 is dependent on the recurrence of trade loans. Management expects NIM to stay around 1.60%.

The absolute NPLs rose QoQ. The bulk emanated from the mid-cap space in India with isolated cases elsewhere. Management believes that the worst is probably over in terms of new NPL formation and expects the pace to taper off. Hong Kong’s 3Q13 net profit declined 24% QoQ due to a 5 bps decline in NIM to 1.55% and a 40% QoQ decline in non-interest income, due mainly to lower treasury income.

Looking to maintain at least flat JAWS in 2014, with high single digit top line growth (we project operating income growth of 8.3% in FY14). What we find positive is that the group continues to see firm growth in wealth management, transaction services and customer treasury flows to support the ongoing expansion of its non-interest income base.  

Source: Maybank Kim Eng Research - 4 Nov 2013