DBS reported a sharp 25% YoY and 29% QoQ drop in 3Q17 net earnings to S$802m. This is below Bloomberg consensus of S$1.14b. The main reason for this was a substantial spike in allowances, which rose from S$304m in 2Q17 to S$815m in 3Q17. Apart from this, the overall results was fairly healthy and in line with expectations.

Net Interest Income rose 9% YoY and 5% QoQ to S$1975m, while Non-interest Income fell 3% YoY but is up 5% QoQ to S$1084m. Total income before allowances rose 3% YoY and 8% QoQ to S$1761m.

On the allowances, management shared that its total exposure to the oil and gas support services industry amounted to S$5.3b, and taking into account the impending implementation of FRS109, it has accelerated the recognition of the residual weak cases as NPAs with a matching increase in specific allowances. It drew on S$850m from general allowance reserve, resulting in a net allowance charge of S$815m. This was to remove “uncertainty about the asset quality outlook”, it shared in its results release.

As of Sep 2017, its oil and gas support services NPAs amounted to S$3.0b, of which cumulative specific allowances of S$1.5b have been made. NPL rate rose from 1.5% in the previous quarter to 1.7% this quarter.

Since our upgrade on 14 Sep 2017 (please refer to our report titled “Time to buy”), the stock has done well and closed at S$22.97 last Friday, up some 12.7% since midSeptember.

We expect some initial knee-jerk share price reaction to the higher-than-expected 3Q17 allowances, especially in view of the recent good price outperformance.

Pending more information and clarification after the analysts’ briefing later in the day, we put our rating and fair value estimate under review for now.

Source: OCBC Research - 6 Nov 2017