• Better-than-expected 3Q
• Guidance is still fairly positive
• Up FV to $21.10

3Q earnings came in ahead of market expectations

DBS concluded the banking sector’s result season with a stronger-than-expected set of earnings. 3Q14 net earnings of S$1.01b, up 17% YoY, were better than Bloomberg’s poll of S$975m. Net Interest Margin (NIM) improved to 1.68% in 3Q14, up from 1.60% in 3Q13 and 1.67% in 2Q14. Loans grew 8% (from a year ago) to S$262b. Net Interest Income rose 14% YoY or 3% QoQ to S$1.60b in 3Q14. Non-interest Income improved 23% YoY or 21% QoQ to S$912m, giving total 3Q income of S$2.51b. For Fee Income, Investment Banking did well and saw a more than doubling in earnings to S$94m (YoY), while Wealth Management jumped 39% YoY to S$142m. Total AUM for HNW amounted to S$77b (pre-Societe Generale Private Banking Asia) or S$89b (post).

Guiding for 8-10% loans growth in 2015

After a slower 3Q, management is now guiding for 7-7.5% loans growth in 2014, followed by 8-10% growth in 2015. Growth will remain board-based, and despite the softness in the local property market, it expects its Singapore mortgage book to grow by S$3.7b-S$3.8b in 2014. It is also expecting NIM to stabilize at around current level. On the Investment Banking side, which saw a strong 3Q, the indication is that its pipeline remains healthy. It is also seeing traction from its growing corporate relationships in China for more corporate activities. Cost-to-income ratio is likely to stay near current level of 45%. Staff headcount has increased 9% YoY to 20,678 by 3Q14.

DBS remains our top pick in the sector; BUY

We have revised up our estimates, mainly on the Non-interest Income side to reflect the healthy guidance from management. Overall, we are expecting almost 10% growth in FY14 followed by 6% in FY15. Using the same valuation metric, but on a blended basis as we head into the final quarter, our fair value estimate moves up from S$19.90 to S$21.10. DBS remains a BUY and is our top pick in the sector.

Source: OCBC Research - 3 Nov 2014