• Maintain NEUTRAL with new GGM-derived Target Price of SGD25.80 from SGD25.30, 3% downside offset by 5% yield, based on 1.28x 2020F P/BV.
• Our long-term ROE assumption of 13.3% vs 9M19’s 13.6% is premised on wealth management gains offsetting NIM squeeze moving forward.
• 3Q19 net profit was slightly ahead of our expectations. However, we believe market concerns on Hong Kong economic developments could limit DBS' share price upside. This report is an update post analyst briefing.

DBS' 3Q19 Net Profit Rose 15% Y-o-y and 2% Q-o-q

• Y-o-y, 3Q19 net interest income rose 8%, with NIM widening 4bps. However, 3Q19 NIM narrowed 1bp q-o-q. A key driver for net profit growth was net fee and commission income, which rose 17% y-o-y and 6% q-o-q. See DBS Announcements.

We Fine-tune 2019F and 2020F Earnings

• Factoring in 3Q19 net profit rise of 2% q-o-q, we raise DBS GROUP (SGX:D05)'s 2019F net profit by 1%. However, we cut our 2020F net profit by 1%, attributed to the guidance of 2020F NIM squeeze.

Management Guided 2020F NIM to be 7bps Narrower Y-o-y

• We forecast 2019 NIM of 1.88%, close to 9M19’s 1.90%. Management guided for 2020F NIM to be 7bps narrower y-o-y, on the assumption of one more rate cut. We forecast 2020 NIM of 1.81%.
• Management sees 2020F total income growth in the low single-digit range – this is on the back of NIM squeeze and mild loan expansion supported by double-digit growth in fee income.
• Strength in wealth management fees is evident from its 3Q19 growth of 22% y-o-y, and AUM expansion of 9% y-o-y to SGD241bn.

DBS HK Performance Is Resilient

• In constant currency terms, DBS HK recorded a 12% y-o-y net profit increase, although it was a 15% q-o-q decline. DBS HK 3Q19 allowances were more than doubled y-o-y and q-o-q – due to additional general allowances taken as a prudent measure.
• DBS HK has a relatively small consumer loan book, with the bulk of loans to China SOEs – hence, DBS sees the current Hong Kong economic situation as not severely affecting its asset quality.

Target Price Based on GGM-derived 1.28x 2020F P/BV

• Our valuation for DBS is based on long-term ROE assumption of 13.3%. This yields a 2020F target P/BV of 1.28x, which is ahead of the 6-year average of 1.21x. See DBS Share Price; DBS Target Price.
• We believe the slight P/BV premium is justified on the back of expected strength in fee and commission income. However, concerns on potential increases in loan loss provisioning for DBS’ Greater China operations could dampen interest for DBS shares, and hence we maintain NEUTRAL.
• DBS declared a 3Q19 dividend of SGD0.30/share – the scrip dividend scheme will not apply. The dividend will be paid on 29 Nov. See DBS Dividend History. (see also listing of Upcoming Dividends of SGX Listed Stocks)

Source: RHB Invest Research - 12 Nov 2019