• We forecast net profit of S$1,405m for 4Q19, up 6.5% y-o-y (on a low base) but down 13.8% q-o-q (seasonal pullback). We expect NIM compression of 4bp q-o-q, fee income growth of 23.6% y-o-y and stable credit cost of 25bp.
• The SARS outbreak in 2003 had limited impact on DBS’ asset quality. Contrary to widely-held perception, DBS’ NPL ratio improved 1.0ppt to 5.7% in 2003.
• We expect quarterly dividend to improve 6.7% to 32 S cents.
• Maintain BUY. Target Price SGD28.65

What’s New

Moderation in loan growth.

• We forecast DBS Group (SGX:D05) to report a moderate loan growth of 3.7% y-o-y and 1.2% q-o-q in 4Q19 with broad-based growth in corporate loans, trade loans and housing loans (drawdown for strong bookings in 2Q19 and 3Q19).

NIM compression.

• We expect NIM to narrow by 1bp y-o-y and 4bp q-o-q to 1.86%. Loan yield had eased as the 3-month SIBOR and SOR receded 11bp and 14bp q-o-q to 1.77% and 1.54% respectively. Competition for housing loans has also intensified.

Maintained growth momentum for wealth management and credit cards.

• We see growth momentum maintained for wealth management fees within continued growth in AUM, while fees from credit cards saw the seasonal up-tick. However, loan-related fees would likely be muted. Overall, we expect fees & commissions to increase 23.6% y-o-y (low base in 4Q18) but recede 3.6% q-o-q (seasonal weakness).
• We expect net trading income to be seasonally lower at S$230m.

Slightly positive JAWS.

• We expect operating expense to have increased 7.8% y-o-y. Cost-to-income ratio (CIR) was seasonally higher at 46.0% (4Q18: 46.3%, 3Q19: 42.2%). Pre-provision operating profit (PPoP) could have increased 9% y-o-y to S$1.9b.

Stable asset quality.

• We expect NPL ratio to have been stable at 1.56%. We estimate credit cost at 25.1bp, slightly lower than the 28.5bp in 3Q19.

Stock Impact

Beneficiary of partial trade deal between the US and China.

• We forecast net profit of S$1,405m for 4Q19, up 6.5% y-o-y (low base) but down 13.8% q-o-q (seasonal pullback). DBS is a beneficiary of the partial trade deal between the US and China as Greater China accounted for 30.4% of its total loans and 27.1% of total income in 3Q19.

Limited impact during SARS outbreak.

• The outbreak of the severe acute respiratory syndrome (SARS) during 2003 had limited impact on DBS’ asset quality and financial performance. NPL ratio receded from 6.7% in 2002 to 5.7% in 2003. Credit cost was stable at 83.7bp in 2003. In fact, loan loss coverage gradually improved to 88.6% in 2004.
• Net profit was stable at S$1,025m in 2003 but surged 97% in 2004, driven by growth in non-interest income.

Banks are yield plays.

• We expect DBS to raise DPS to S$1.28 for 2020 (S$0.32 per quarter), which represents dividend payout ratio of 54.5%.
• DBS provides attractive dividend yields of 4.7% for 2019F and 5.0% for 2020F.

Earnings Revision / Risk

• We trim our net profit forecast for 2020F by 2.1% due to a higher credit cost of 27.5bp (previously 25.1bp).

Valuation / Recommendation

• Maintain BUY. Target price is based on 1.41x 2020F P/B, derived from the Gordon Growth model (ROE: 12.0%, COE: 8.5% (beta: 1.2x to 1.3x), Growth: 0.0%).

Share Price Catalyst

• Partial trade deal between the US and China.
• Improvement in CIR due to digitalisation and strategic cost management initiatives.

Source: UOB Kay Hian Research - 7 Feb 2020