Yesterday, DBS published their first quarter 2015 (1Q15) results which were in-line with estimates although margin and underlying loan growth trends disappointed slightly. Macquarie Equities Research (MER) released a research report on the same day (i.e. 27 April) stating the reasons why they are maintaining their “Outperform” rating on the stock…
 
Key points and conclusion – (i) slight disappointment in margins partially due to Greater China but MER expects better momentum in the second quarter (ii) underlying loan growth was flat quarter-on-quarter (QoQ) while asset quality is holding up despite a slight uptick in non-performing loans (NPLs) in Singapore and Greater China, (iii) capital ratios were better than expected as RWA increased less than expected by MER.
 
Impact
Earnings summary – In 1Q15 DBS reported an adjusted net profit of S$1,133m (+10% year-on-year (YoY), +35% quarter-on-quarter (QoQ) after excluding the one-off S$136m gain from property disposal. This was in-line with MER’s estimate of S$1,106m. Adjusted revenue was a touch higher from higher fees and commission income and investment income, while loan loss provisions were also marginally higher than expected by MER.
 
Margin trends and volume growth – Net interest margins (NIM) slightly disappointed mainly due to contraction in trade loans and lower margins in Greater China trade financing, in MER’s view. NIMs were at 1.69% in 1Q15 versus 1.71% in 4Q14 and 1.66% in 1Q14. MER expects better NIM momentum in the second quarter from higher Singapore short term rates. Loans grew +11% YoY, +2% QoQ, while General Commerce loans, a proxy for trade finance, declined -1% YoY, -7% QoQ). Adjusted for currencies, underlying loan growth remained flat QoQ due to the contraction in trade finance loans. MER sees some risk that DBS may not achieve its full year target of 8% YoY underlying loan growth.
 
Asset quality and capital – Non-performing loan (NPL) ratios in Singapore, Hong Kong, and Greater China ticked up slightly, while NPL volumes in South Asia (mainly India) declined. As a result, group NPL ratios remained unchanged QoQ at 0.9%. DBS’s capital ratios were higher than expected by MER, as risk-weighted assets increased only by 2% QoQ (in-line with loans). DBS reported 12.2% CET1 ratio (fully loaded Basel 3), which is above the 12% level that MER considers adequate for Singapore banks.
 
Outlook and targets – “started the year on a solid footing “, “slowdown in trade volumes “, “keeping a watchful eye on the economy”. In MER’s view, the 8% yoy loan growth target could potentially be at risk.

Action and recommendation
MER has an Outperform rating on DBS – target price S$22.00.
 
MER believes DBS will show good earnings momentum, with double-digit EPS growth in 2015. Margins and profitability levels are likely to increase while current valuation multiples at 1.3x book (2015) for more than 11.5% normalised return-on-equity, look undemanding.
 
On the negative side, MER sees some revenue growth headwinds for 2015 from falling commodity prices and a shrinking trade finance book as well as the risk of potentially higher provisions for the China, commodity finance and nontrade US dollar denominated exposures.

Source: Macquarie Research - 28 Apr 2015