Lower SME Mix, North Asia Should Drive Growth

• DBS (SGX:D05)’s 1H20 PAT came ahead of Street expectations on stronger trading income. The strength of the Group’s franchise is that it is predominantly exposed to large corporates & MNCs. These are better equipped to ride out COVID-19 volatility.
• Loans under moratoriums make up just 5% of the book, pointing to lower stress amongst its customers. Also, a third of its loans are in North Asia, where growth is returning from earlier easing of lockdowns.
• While the MAS dividend caps will blunt payouts in the near term, Management claims they would aim to ramp up as soon as possible, given DBS’ strong capital reserves.
• Maintain BUY.

Stronger Asset Franchise

• DBS has been aggressively building pre-emptive reserves, where GP now sits 24% higher than MAS requirements. Nevertheless, we expect asset quality to turn sour – especially amongst SMEs – as moratoriums are lifted. But we believe the impact may be better contained given just 11% of its loan book is SME. 82% of these loans have not taken any moratoriums, according to management.
• Separately, deposits expanded 14% y-o-y, driven by a 29% y-o-y increase in CASA. These flight to safety deposits should provide DBS with an low cost funding advantage as well as gapping opportunities.

Potential for Earlier Growth Recovery

• North Asian loans increased 11% y-o-y in 1H20, whereas Singapore increased 3% y-o-y. Earlier re-opening & recovery in China and HK may provide positive growth momentum for DBS going forward.
• The group has built significant cross-border infrastructure and a fee generating product suite to go along with it. These should help gear DBS to gain market share in a recovery cycle.

Maintain BUY. New Target Price: SGD22.90

• While we have lower 2020E PAT by 10% for higher cautionary provisioning, we raise 2021-22E by 2-7% from potential North Asian recovery. We have adjusted DPS to MAS guidance, but expect payouts to significantly improve from 2022E onwards given strong capital levels. Its fixed quarterly payout policy also increases dividend visibility, in our view.
• We raise our DBS's multi-stage DDM (COE 10.3%, 3% terminal) Target Price to SGD22.90 (from SGD22.10).
• With 15% upside, maintain BUY.

Source: Maybank Kim Eng Research - 6 Aug 2020