• DBS guides for FY19 NIM expansion of 4-5bp y-o-y on no rate hikes, 5-6bp in event of hikes. We see +5bp as fixed-rate mortgages get repriced upwards.
• Net trading income improved YTD, but may be weaker in FY19F. That said, we think there could still be upside potential to the S$200m/quarter guidance.
• Although CET-1 ratio is likely to be kept on the upper end of 12.5-13.5% in FY19F, it guides for DPS to remain firm at 120 Scts/share.
• Maintain ADD, with S$29.00 Target Price.
• DBS projects FY19 ROE to improve towards 13.0% on rate hikes; we believe this could be a longer term prospect.

NIM Expansion of 4-5bp in FY19 Doable

• DBS GROUP HOLDINGS LTD (SGX:D05)’s NII rose 6% y-o-y alongside a 10bp y-o-y rise in FY18 NIM to 1.85%.
• While there could be a possibility of fewer than two US Fed rate hikes in 2019F (CGS-CIMB’s house view), we believe NIM will still rise in FY19F as fixed-rate mortgages get re-priced upwards towards SIBOR-pegged housing loans; the average interest rate for DBS’s fixed-rate housing loans (c.50% of its SG mortgage portfolio) was 2.1% in 4Q18 vs. the latter’s 2.5%. HK NIM was unchanged in 4Q18 due to HIBOR volatility. Although its high 87.6% LDR may provide a boost to earnings, significant NII growth could be capped by rising funding costs.
• We pen in a 5bp rise in FY19F NIM to 1.9%.

Net trading income guidance of S$200m/q has potential for upside

• DBS’s net profit of S$1.32bn in 4Q18 (-7% q-o-q, +8% y-o-y) was marred by weaker net income from wealth management (-25% q-o-q, -4% y-o-y) and trading (-35% q-o-q, +0.4% y-o-y). Its wealth segment’s asset under management was stagnant at S$220bn in 4Q as a drop in equity valuations offset net new money growth; wealth management income dipped to a two-year low.
• Given the volatile markets in 4Q18, DBS conservatively guides for net trading income of S$200m/quarter, which we think is a bit conservative -- fair considering the uncertain macroeconomic outlook, but upside to this figure is likely.

We Expect 5.3% Y-o-y Loan Growth in FY19F

• Driven by loans to Hong Kong and Singapore, DBS’s loan base rose 6.8% y-o-y in FY18 (FY17: +7.2%). The contraction of trade loans seen in 3Q18 was stemmed in 4Q18 as pricing improved.
• Our forecast of a 5.3% loan expansion in FY19F incorporates our expectation of lower mortgage bookings due to property cooling measures introduced in Jul 2018. DBS’s review of its portfolio revealed no material cause of asset quality concerns; we bake in 23bp of credit costs for FY19F.

Maintain ADD With GGM-based Target Price S$29.00

• We think that there could be a positive read-through into OVERSEA-CHINESE BANKING CORP (SGX:O39, OCBC) and UNITED OVERSEAS BANK LTD (SGX:U11, UOB)’s FY19F NIM guidance given the continued repricing of mortgages and that both banks have shored up on liquidity in expectation of rising funding costs. Mid-single-digit loan growth guidance should also apply to DBS’s peers given the slower regional loan growth.
• Potential stock catalyst: Moderation of US-China tensions.
• Downside risks: asset quality weakness.

Source: CGS-CIMB Research - 19 Feb 2019