• DBS delivered a quarter of high quality earnings with a 2Q14 net adjusted earnings of S$930m which was in line with our earnings expectations
• Loans growth remained on track at 2% q-q, NIM was a positive surprise at 1.67%, and the highest we have seen in the last 7 quarters. Asset quality continues to be robust with NPL ratio at 0.9%
• Fees and commission were largely flat q-q due to scale-back of traderelated fees but core competency areas like wealth management grew strongly q-q by 18%
• Interim dividend of 28 cents per share has been declared
• Upgrade to "Buy”, with a revised TP of S$20.50 based on a revised P/B of 1.4X and revised FY14E BVPS of S$14.64

What is the news?

DBS Group Holdings announced its 2Q14 results on 1 Aug 2014. DBS reported a net profit of S$930m, excluding one-time item of S$39m. Although bottom-line decreased by 10% q-q, we view this quarter’s earnings as high quality earnings compared to 1Q14 where we opined that the beat on our expectations was nothing to get excited about. 1H14 net core profits forms ~52% of our FY14 forecast. Net interest income rose 5% q-q as loans grew 2% and NIMs remained stable at 1.67% due to maintenance of overall asset yields while funding costs remained stable. Deposits grew 3% q-q, after stripping out a short-term corporate deposit (~S$10b) that flowed out and is driven by growth in USD and SGD deposits. CASA ratio remains high at 56% and management sees no strain in the SGD deposit space.

DBS is facing some margin pressure and pricing compression from their HK side but have been able to price up on the Singapore front. Wealth management fees grew strongly at 18% q-q with AUM growth from high networth individuals. Asset quality continues to be robust, in line with our view of the strength of their China trade book. Management has guided for 8%-10% full year loans growth, cost/income ratio of 45% and NIMs of 1.65%. In our last sector report, where we believed the deviation of DBS’s share price performance vis–à–vis its fundamentals is unwarranted and should reverse, share price has inched up ~6.4%.

How do we view this?

The healthy growth in net interest income and stable funding costs with solid funding bases has led us to conclude this is a quarter of high quality earnings. We had previously anticipated a slight dip in NIMs due to the loosening liquidity in China, but NIMs continue to hold up. Fees from trade-related services should regain growth momentum going forward as DBS was deliberately tightening on the trade finance business.

We expected that their treasury income could trend downwards in this quarter if hedging activities slow down due to RMB depreciation against the USD but had noted the two-way swings in RMB could remain prevalent. Management has mentioned that activities in July are picking up again. We tweak our FY14E core EPS up slightly (~1.3%) down and our other estimates are largely unchanged. DBS remains our top pick for its robust and disciplined trade finance business, strong deal flow pipeline and best positioning to benefit from an interest rate cycle revival in the medium term.

Investment Actions?

We tweak our forecasts for FY14 slightly and based on our revised FY14E BVPS of S$14.64, and a revised P/B of 1.4X to reflect its growth momentum, we derive a new target price of S$20.50. Based on DBS’s potential to outperform, we upgrade our rating to “Buy”.

Source: Phillip Securities Research - 4 Aug 2014