DBS published their second quarter 2015 results on Monday (27 July) and despite strong results, its shares fell 1.5%. Yesterday, DBS continued its decline and ended the day 0.4% lower. The local bank held a media and analyst briefing immediately after announcing results and Macquarie Equities Research (MER) released a summary on the same day. Read more for details…
 
Event
Key points and conclusion – (i) Net Interest Margin (NIM) to stabilize from here (ii) Wealth management to continue to support revenue growth (iii) mildly positive read across from DBS to other Singapore banks, and due to strong performance in Hong Kong to HSBC and StanChart.
 
Second quarter results do not change MER’s overall positive view on DBS. MER continues to believe that (i) volume growth will be a challenge for the banking sector going forward (ii) wealth management and fee income most likely to support revenue growth and Singapore banks are well positioned in this context (iii) it is too early to make a more negative call on asset quality for Singapore banks (iv) potential for positive surprises on dividend payments for DBS and UOB.
 
Impact
Stable NIM outlook – After a 6 basis point (bp) quarter on quarter (QoQ) increase, NIM is expected to remain stable at around 175 bp. Management expects for NIM pressure from potential China rate cuts and marginal S$ funding pressure (savings bond related) to be mitigated by continued S$ book re-pricing for higher short term rates in Singapore. Loan Deposit Rates (LDR) for HK$, US$ and RMB are now above 100% after managing down excess liquidity by lowering higher cost fixed deposits – which supported NIM in 2Q15. The liquidity coverage ratio – which is management’s main focus - remains healthy at 131%.
 
Wealth management franchise delivers – The Singapore banks are a key beneficiary of the strong wealth management growth theme, in MER’s view. DBS is now the Bancassurance market leader in Singapore with around 35% market share based on Annual Premium Equivalent (APE). Wealth management income - which grew 40% YoY and 3% QoQ to S$378m - accounts for 14% of total income in 2Q15 compared to 11% in 2014.
 
Read across to other banks – (i) OCBC may have given up some market share in Wealth Management (WM) but the read across from DBS is still positive given strong industry growth rates and OCBC’s strong WM franchise (ii) DBS had a record quarter result in Hong Kong partially due to strong Wealth Management performance as a result of the HK-CN stock connect. Positive read across to HSBC, StanChart and OCBC.

HSBC should be a beneficiary of higher trade volumes on HK-CN stock connect, as many investors put their trades through HSBC - the leading custodian bank in HK. Current rules allow for easier transacting when all shares are placed with just one custodian. (iii) DBS increased its interim dividend in 2Q15. UOB at 12.8% CET1 ratio looks overcapitalised and could positively surprise on dividends this and next year MER believes. However, the read across from the operating performance of DBS in ASEAN-ex Singapore was less positive due to revenue and cost pressure in the region.
‌
MER’s action and recommendation
MER has an Outperform rating on DBS – 12 month target price of S$23.00.
 
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 (2016E) for 12.5% normalised ROE look undemanding.

Source: Macquarie Research - 29 Jul 2015