DBS failed to keep its opening gains yesterday (2 November) as the local bank traded into negative territory shortly after the opening bell. Its share price hit an intra-day low of $17.10 (-1%) within the first hour before rebounding to finish at $17.25.
 
Macquarie Equities Research (MER) issued a report yesterday (2 November 2015) after DBS reported their third quarter earnings, reiterating their preference for DBS among all local banks. Here are some excerpts from the report.
 
Key points and conclusion – (i) 8% earnings beat (ii) stable asset quality (iii) rather strong cost growth. MER thinks that the third quarter results were good and supportive to their positive investment case. Importantly, asset quality is holding up well but MER remains watchful on the commodity-linked exposures.
 
Impact
8% Earnings beat – In 3Q15, DBS reported net profit of S$1,066m (+6% YoY, -5% QoQ), which compares to MER’s consensus estimate of around S$990m. The 8% earnings beat was mainly a result of higher net interest income, and trading income. Loan loss provision was in line with expectations. However underlying operating cost growth was quite punchy (+8% YoY), leading to underlying cost-income ratio of 45%.
 
Margins higher, weaker volume growth trends, decline in capital ratios – In 3Q15, Net Interest Margin increased to 178bp (+0.1% YoY, +0.03% QoQ) mainly due to lower funding cost. Loan growth adjusted for constant currency declined 1% QoQ due to lower trade loans (-S$5bn QoQ). Common Equity Tier 1 ratio declined to 11.9%, compared to 12.3% a quarter ago due to dividends and higher RWA.
 
Asset quality holding up – In MER’s recent research report ‘Fighting the Markets’ MER said that asset quality trends are a key investment criteria. Non-Performing Loan (NPL) volumes declined QoQ and the NPL ratio remained stable at 0.9%. The loan loss provisioning ratio was 0.25%, driven by general provisions which resulted into a NPL coverage ratio at 145%. DBS provided more disclosure on its commodity linked exposures (ex bank backed exposures). Total Oil & Gas exposure amounts to S$22bn (8% of total loans), thereof less than S$9bn (~3% of total loans) to O&G support service companies (the exposure where OCBC had issues this quarter).
 
Earnings and target price revision

• No change.

 
Price catalyst

• 12-month price target: S$20.00 based on a Price to Book methodology.
• Catalyst: asset quality trends, dividends.

 
Action and recommendation
MER has an Outperform rating on DBS – target price S$20.00. DBS remains MER’s top pick among the Singapore banks.
 
MER believes the key reasons to buy DBS are (i) good earnings momentum in a relative context, (ii) relative beneficiary of higher rates given the strong S$ liquidity position, (iii) potential to lift dividend payout ratios, and (iv) potential to shift the strategic focus towards cost efficiency if growth opportunities continue to disappear.
 

Source: Macquarie Research - 3 Nov 2015