• We expect NIM to increase further as pass-through of loan repricing takes effect. We think FY18F margins will come in within the guided 1.86- 1.87%.
• We lower FY18F loan growth to 6.3% due to lacklustre +0.7% q-o-q in 3Q18 and lower trade loans. Credit costs expected to normalise towards 21 bps.
• We cut our FY18- 20F EPS by 2.2- 3.8% as we factor in the 3Q18 results. Maintain HOLD with a lower GGM Target Price of S$27 (ROE 13.0).

Funding Ahead of Rising Deposit Costs

• In terms of funding, DBS had let some of its US$, HK$, and Rmb run off as it deemphasised the growth of trade loans in 3Q18 given its unattractive pricing. The bank guides to still maintain the build-up of its funding base over the past quarter (mainly US$ and HK$), which we suspect will be for sustained non-trade loan volumes.
• With asset yields poised to increase amid the lagged pass-through of loan repricing and still-rising deposit costs, we think that NIMs are likely to come in within management’s guidance of 1.86-1.87% in FY18F.

Lacklustre Loan Growth

• Loan growth was more moderate at 0.7% q-o-q in 3Q18 (2Q18: 3.0%). Key regional drivers were rest of the world (+5% q-o-q), South and Southeast Asia (+4% q-o-q), and Hong Kong (+2% q-o-q); the Rest of Greater China’s loan book contracted 7% q-o-q as the bank deemphasised the growth of trade loans.
• We now tone down our expectations of loan growth to 6.3% from 6.9% previously. YTD 9M18 loan growth was 5.3%.

Watchful on Asset Quality of Indonesian Loan Book

• Asset quality remained healthy although total NPA edged up to S$5.90bn 3Q18 (2Q18: S$5.87bn) on weaker recoveries. NPA coverage edged up to 93% of loans (2Q18: 92%) while NPL ratio held steady at 1.6%. Total allowances rose to S$236m (2Q18: S$105m) as SPs normalised to 21bp of loans (2Q18: 12bp) given the absence of large writebacks.
• Further impairment of S$46m (or 5bps) were set aside mainly due to a lumpy exposure backed by a performance guarantee.
• There was some NPL pickup from the South and Southeast Asia portfolio (+11% q-o-q/-13% y-o-y), where the bank highlighted an Indonesian corporate from the general commerce industry being caught up in a global restructuring exercise.
• Risks from Greater China are relatively contained with the bank identifying less than 20 names that need watching.
• We forecast credit costs to normalise towards 21 bps in FY18 vs the bank’s through-the-cycle average of 26-29 bps or S$800m per annum.

Valuation Still Above Mean at 1.3x FY18F P/BV; Maintain HOLD

• Our core EPS is slashed by 2.2-3.8% and DPS cut by 0-7% for FY18-20F as we factor in 3Q18 results.
• We maintain a HOLD with a lower GGM Target Price of S$27 (ROE of 13%).
• An attractive entry point would be about 1.2x P/BV or below S$23.
• Upside risk is stronger loan growth while downside risk is weaker sentiment due to trade tensions and asset quality pressures from regional markets.

Source: CGS-CIMB Research - 05 Nov 2018