• Maintain BUY with lower SGD28.80 Target Price from SGD29.80, pegged to 1.5x 2019F BV, 16% upside plus 4.8% FY19F yield.
• Our Target Price is based on our long-term ROE assumption of 13.5%, which is higher than 2018’s 12.2% given expected future NIM expansion and cost efficiencies with digitisation.

4Q18 Results Released This Morning Were in Line With Expectations

• DBS GROUP HOLDINGS LTD (SGX:D05) 2018 net profit of SGD5.58bn was up 28% y-o-y – close to our forecast of SGD5.68bn and consensus’ SGD5.72bn.
• 4Q18 NIM of 1.87% was 1bps wider q-o-q, while loans expanded a marginal 1% q-o-q. If we strip off the impact of earnings growth from the 54% fall in allowances, profit before allowances was still up 9%.

4Q18 Net Profit Rose 10% Y-o-y, But Was Down 7% Q-o-q to SGD1.32bn

• Driving the y-o-y earnings growth was an 11% rise in NII, partly offset by an 11% rise in expenses and 13% decline for “other non-II”. Excluding one-time items, 4Q18 core net profit was up 8% y-o-y.

4Q18 NIM of 1.87% Was 1bp Wider Q-o-q and Up 9bps Y-o-y

• DBS’ 4Q18 NIM widened by 1bp q-o-q to 1.87%, driven by higher Singapore interest rates. Assuming no further Federal Funds Rate (FFR) hikes in 2019, management guided (during analyst briefing) for a 4-5bps NIM expansion in 2019, which will come from the repricing of loans. If FFR were to be hiked, the NIM expansion in 2019 could be even stronger.
• We are forecasting 2019 NIM of 1.9%, up from 2018’s 1.85%.

2018 Gross Loans Grew by 6.7%

• DBS’ 2018 gross loans grew by 6.7%, with building & construction loans up SGD12bn (or 19%) and loans to financial institutions, investment & holding companies up SGD7.8bn (or 45%). Management guided for 2019 loans to expand in the mid-single-digit levels, with likely strength from business loans.
• Mortgage expansion is expected to be muted following the Jul 2018 property cooling measures – DBS said mortgage bookings are 30-40% lower vs pre-measures. We are forecasting 2019 loan growth of 5%.

Expect 43% CIR for 2019

• DBS’ 4Q18 CIR was at 46.3%, up 1.9ppts y-o-y. This was partly the consequence of lower treasury markets income. Management guided for 2019 CIR of 43%, vs 2018’s 44%.
• We believe the digitisation initiatives will contribute to lower CIR not only in 2019 but also beyond.

DBS Declared a Final Dividend of SGD0.60/share

• This gives DBS’ FY18 full-year dividend of SGD1.20/share. The scrip dividend scheme will not be applied.
• Our long-term ROE assumption is 13.5%, lowered from 13.8%. Management guided for 2019 ROE of 12.5%, on the assumption that there will be no further FFR hikes. This reflects management’s bullish expectations as 2018’s 12.1% ROE was already the highest in more than a decade.

Our New Target Price of SGD28.80 Is Pegged to 1.5x 2019 BV

• This is derived from CoE assumption of 10.1%. We believe the ascribed P/BV premium over the 5-year historical P/BV of 1.2x is justified, given rising NIM and cost efficiencies from digitisation.
• Downside risks to our forecasts include higher impairment charges and han-expected NIM.

Source: RHB Invest Research - 18 Feb 2019