Resilient Results. High Dividend Visibility

• DBS GROUP (SGX:D05)’s 9M19 core earnings were well ahead of MKE/Street estimates due to higher non-interest income and better cost management. See DBS Announcements; DBS Latest News.
• In our view, the group’s post GFC fundamental shift towards commercial banking from volatile universal banking is bearing fruit with a business mix that can effectively navigate regional uncertainty.
• Interest income, fees and trading all delivered despite a tough macro backdrop given the HK unrest, trade war and slowing Singapore.
• DBS’ dividends are on track to meet our expectations in 2019E. With CET1 at 13.8% - higher than the 13.5% management comfort level – it can also potentially surprise on the upside. See DBS Dividend History.
• Together with good dividend visibility in 2020E, we upgrade DBS to BUY with a higher Target Price of SGD29.92 following post-3Q19 changes.

Fundamental Drivers Delivering

• DBS’ fee income increased 17% y-o-y, led by wealth management (+22% y-o-y) and transaction services (+7% y-o-y) – areas that should have less volatility through the cycle. Its strong domestic franchise enabled a 6% y-o-y increase in low-cost current accounts and helped maintain a CASA mix of over 58% of total deposits, providing a funding cost advantage. Despite this, we estimate NIMs may fall 5bps y-o-y in 2020E due to lower interest rates, but this should be partly offset by continued loan growth, especially outside Singapore.
• Separately, DBS’ cost-to-income ratio fell 170bps y-o-y, pointing to the investments made to improve efficiency, especially through technology. To reflect this, we have lowered our 2019- 2021E opex assumptions by 2-3%.

Asset Quality – Especially HK – Needs to be Watched

• At 29bps credit charges were flat y-o-y. While provisions increased, this was mostly for general provisions to take account of increased macro uncertainty – especially in HK. In fact, the NPL ratio fell 10bps y-o-y to 1.5%.
• Any specific sectoral distress is so far absent, according to management. In this backdrop, we have lowered our 2020-2021E credit charge assumption by 1-16%, but remain cautious going in to this part of the cycle.

Upgrade to BUY With Higher Target Price of SGD29.92

• Our post-3Q19 adjustments taking in to account higher non-interest income, lower NIMs and credit charges sees us raising 2019-2020E core earnings by 1-6%, while we lower 2021E by 2%.
• We roll forward our multi-stage DDM (COE 10.3%, 3% terminal) valuation to 2020E to arrive at a new Target Price of SGD29.92. See DBS Share Price; DBS Target Price.
• With 12% upside, upgrade to BUY.

Source: Maybank Kim Eng Research - 11 Nov 2019