• 1Q surprised with strong earnings
• Outperformance; lock in some profits now
• Buy at S$27.50 or lower

1Q Was Higher Than Consensus

DBS posted 1QFY19 net earnings of S$1.65b, up 9% YoY and 25% QoQ, this is better than consensus expectations of S$1.48b based on Bloomberg estimate. The strong set of results came from the improvement in several areas, enabling total income to rise 6% YoY and 9% QoQ. For QoQ, the increase came from the sharp jump in Non-interest Income, which benefited from a 93% increase in Net Trading Income.

Allowances came off from S$164m in 1Q18 and S$205m in 4Q18 to S$76m in 1Q19. Net Interest Margin improved from 1.83% in 1Q18 and 1.87% in 4Q18 to 1.88% in 1Q19. Moving forward, DBS has also announced that it will pay quarterly instead of semi-annual dividends from FY19 to provide shareholders with a more regular income stream. For the 1Q, the dividend is 30 cents per share. DBS shares will quote ex-dividend on 17 May 2019.

Healthy NIM; Mid-single Digit Loans Growth

Management is positive that NIM will improve this year, largely as last year’s rate increases have not fully flow through into FY19. Although the mortgage loans book contracted slightly in 1Q19, management is retaining its full year guidance for mid-single digit loans growth. We expect fee income to pick up this year as better market outlook and activities will usher in more IPOs and corporate actions.

Share Price Outperformed Since Our Last Report

Since our last report on the Singapore Banking sector titled “It still sparks joy” on 26 March 2019, where we reiterated our OVERWEIGHT rating for the sector, the sector has done well. Based on the FTSE ST Financial Index (FSTFN), gains for the same period was 7.0%, while the three banking stocks appreciated an average of 11.6% during the same period. DBS in particular, moved up from S$25.12 to S$28.40, up 13.1% over the same one-month period.

As the share price is now close to our revised fair value target of S$29.18, with an upside of 2.7% based on the closing price of S$28.40 on 29 April 2019 (after a stellar 1-day gain of 3.6% on 29 April 2019), we are downgrading the stock to HOLD and will be buyers at S$27.50 or lower. Do note that DBS will trade ex-dividend of 60 cents on 2 May and 30 cents on 17 May 2019.

Source: OCBC Research - 30 Apr 2019