• DBS achieved 11.1% y-o-y growth in net interest income, driven by loan growth of 6.7% y-o-y and NIM expansion of 9bp y-o-y. Healthy growth in net interest income helped offset the drop in wealth management and seasonal weakness in net trading income.
• Net profit of S$1,319m (+10.5% y-o-y) was slightly above expectations.
• We expect continued growth in 2019. Management team is being strengthened, which augurs well for future growth.
• Maintain BUY. Target price: S$28.40.

4q18 Results

• DBS GROUP HOLDINGS LTD (SGX:D05) reported net profit of S$1,319m (+10.5% y-o-y), slightly above our expectations of S$1,289m.

Growth from non-trade corporate loans.

• Loan growth was 6.7% y-o-y and 1.3% q-o-q, in line with management guidance. The sequential expansion was driven by non-trade corporate loans in Singapore. Trade loans and consumer loans (growth from mortgages offset by declines for margin financing) were flat q-o-q.

Gradual but steady NIM expansion.

• NIM expanded steadily by 9bp y-o-y and 1bp q-o-q to 1.87%, benefitting from higher interest rates in Singapore. NIM expansion helped generate a healthy 11.1% y-o-y growth in net interest income.

Wealth management affected by market turmoil.

• Contributions from transaction services, loans related and cards grew 10.5%, 16.9% and 33.8% y-o-y respectively.
• Wealth management fees declined 4% y-o-y and 25.3% q-o-q due to increased risk aversion in 4Q18. AUM grew 7% y-o-y but was flat q-o-q at S$220b.
• Overall, fees & commissions were flat y-o-y.

Seasonal weakness in net trading income.

• Net trading income was seasonally softer at S$229m, down 35% q-o-q but flat y-o-y.

Asset quality benign.

• NPL balance declined 2.2% q-o-q. NPL ratio edged lower by 6bp q-o-q to 1.50%. DBS kept credit costs at 24bp despite stable asset quality. Thus, loan-loss coverage improved 3.2ppt q-o-q to 91.2%.
• DBS has declared a final dividend of 60.0 S cents/share.

Stock Impact

Continued growth in 2019.

• Management has guided for mid-single digit loan growth (5-6%) and continued NIM expansion in 2019. NIM is expected to expand 4-5bp even if there are no interest rate hikes.
• Management has also guided for high single-digit growth in total income.
• Cost-to-income ratio is expected to improve to 43% (2018: 44%). Specific provisions should come in at cycle average (we assume 25bp). Management expects ROE to improve in 2019.

Local incorporation in India.

• DBS plans to launch its local subsidiary in India on 1 Mar 19. DBS currently has 12 branches in India. Management plans to double the size of its branch network by end-19.
• DBS will focus on SME and Consumer businesses in India. Its Digibank has pivoted to focus on customer profitability instead of customer acquisition.

More Citi bankers join DBS.

• Olivier Lim joined the board of DBS in Nov 18. He served at CapitaLand (SGX:C31) between 2003 and 1014 in various capacities, including deputy CEO, CIO and CFO. Prior to CapitaLand, Mr Lim had spent 13 years at Citibank Singapore with the corporate and investment bank, including as head of its real estate unit.
• Han Kwee Juan will become DBS’ Group Head of Strategy and Planning with effect from Apr 19. Mr Han spent 27 years at Citibank, leading businesses in consumer banking, corporate banking and transaction banking. He has been CEO of Citibank Singapore since 2012. He oversees retail banking, wealth management, cards, personal loans, mortgages and retail SME.

Earnings Revision / Risk

• We have kept our earnings forecast relatively unchanged.

Valuation / Recommendation

• Our target price of S$28.40 is based on 1.48x 2019F P/B, derived from the Gordon Growth OE: 8.5% (beta: 1.15x), Growth: 1.0%).
• Maintain BUY.

Source: UOB Kay Hian Research - 19 Feb 2019