• We lower our sustainable ROE assumption to 9.4% from 11.2% vs 1Q20’s 9.2% on higher provisioning.
• DBS' 1Q20 net profit released this morning accounted for 21% and 22% of our pre-results and consensus’ forecasts, and we cut our FY20F- 22F earnings.
• Given the uncertainties, there are risks of provisioning being even higher than our revised forecasts.

DBS' 1Q20 Net Profit Fell 29% Y-o-y, and We Expect Weak Future Earnings

• DBS (SGX:D05)'s 1Q20 total income rose 13% y-o-y, driven mainly by other non-II’s 39% surge from gains in investment securities. DBS’ allowances jumped to SGD1.09bn (1Q19: SGD76m) – this was the main cause for the earnings fall.
• For FY20, management guided for profit before allowances to be at FY19’s level.
• We cut FY20F-21F earnings by 14% each, mainly due to increased provisioning expectations.

NIMs to Narrow in 2020

• DBS' 1Q20 NIM of 1.86% was 2bps narrower y-o-y, but flat q-o-q. NII rose 7% y-o-y. Management said the recent interest rate cut has not impacted 1Q20 NIM.
• For FY20, we forecast NIM of 1.75% and loan growth of 2%.

DBS Guided for Credit Costs to Rise Between SGD3bn and SGD5bn (80- 130bps) Cumulatively Over Two Years

• Small & medium enterprise loans are higher risk in the current circumstances, and accounts for 10% of DBS’ loans composition. However, these are predominantly secured against property.
• We forecast overall FY20-21 provisions of SGD2.38bn and SGD1.78bn, which works out to a cumulative 114bps for this timeframe.

DBS Identified Eight Industries That Are More Directly Impacted by the Slowdown

• These account for SGD46bn in loan from large corporates. Oil and gas accounts make up the largest share: SGD23bn, of which oil and gas traders account for SGD5bn in loans – 50% are backed by bank letters of credit. Aviation accounts for SGD6bn in loans, of which 35% are for national airlines backed by aircraft.

DBS Declared a 1Q20 Dividend of 33 Cents/share

• The scrip dividend scheme will not apply.
• 1Q20 CET-1 of 13.9% is above the bank’s target operating range of 12.5-13.5%, which should help support future dividends.
• Management said it will adjust the dividend policy, as the impact of COVID-19 unfolds. We forecast a FY20 dividend of SGD1.00/share, lower than FY19’s SGD1.23.

We Have a Target 2020F P/NBV of 0.96x

• Uncertainties make it unlikely for DBS to revert to its 5-year historical average P/NBV of 1.19x in the near term.
• Keep NEUTRAL, new GGM-derived SGD18.70 Target Price from SGD21.50, 3% downside, 5% yield, based on 0.96x 2020F P/NBV.

Source: RHB Invest Research - 30 Apr 2020