Yesterday, DBS published their fourth quarter 2014 results which showed a miss in earnings and dividend expectations, negative operating leverage for the full year and no improvement in capital ratios, increasing margins, healthy loan growth and stable asset quality.

While the bulls will continue to focus on the “higher rates” story for DBS, Macquarie Equities Research  (MER) stated in their research report released yesterday that they see some more headwind for earnings growth mainly relating to trade finance, capital markets, commodity finance related exposures, negative operating leverage, higher loan loss provisions…
 
 
Earnings summary – DBS reported a fourth quarter of 2014 (4Q14) net profit of S$838m (+4% year-on-year (YoY), -17% quarter-on-quarter (QoQ) which is below MER’s estimate of S$887m and market expectations of S$870m. Relative to MER’s estimates, commission income was lower while costs and loan loss provisions came in higher. On a full year basis, costs grew faster than revenues leading to an increasing cost/income ratio of 45% (+1.1%) for the full year. DBS will pay a full year dividend of 58 cents (flat YoY) while MER expected 62 cents and consensus was looking at 60 cents.
 
Margin trends – Net-interest margins for the group continued to increase to 1.71% (+0.03% QoQ and 0.1% YoY) which was in-line with MER expectations. However, the margin improvement was mainly a result of higher yields on interbank assets and securities while gross margins in trade finance are again under pressure (-0.17% QoQ) partially due to a change in the currency mix. Funding costs for the group declined slightly (-0.2% QoQ).
 
Volume growth, asset quality and capital – Loans growth was ahead of our expectations. Loans grew 11% YoY (9% YoY adjusted for currency effects) in 4Q14. Asset quality remained good with the non-performing loans ratio remaining at 0.9%. Despite a lower than expected dividend payment, the Tier 1 common capital ration for DBS declined (-0.2% bp QoQ and flat YoY) to 11.9% (Basel 3 fully loaded) while MER was expecting 12.2%. For Singapore banks, MER considers a minimum of 12% as adequate.

 
MER’s action and recommendation
MER has a Neutral recommendation on DBS – with a 12-month target price of S$21.00. MER had cut their recommendation on DBS on 27 January 2015 to Neutral from Outperform.
 
DBS is a consensus buy (85% buy and no sell rating on Bloomberg) and market expectations on topline growth look too optimistic to MER.
 
Revenue growth headwinds from falling commodity prices, renewed margin pressure in trade finance, a more uncertain outlook for financial market related income and moderating loan demand will make it challenging for DBS to meet the 10% YoY top-line growth expectation by the market in 2015.

Source: Macquarie Research - 11 Feb 2015