Business Mix Geared Towards Regional Recovery

• DBS (SGX:D05)’s 9M20 PAT was higher than MKE/Street expectations. Strong fee income from its wealth management franchise helped and this momentum should pick up going forward. Concurrently, its exposure to North Asia and large corporate client mix should support DBS leading operational recovery ahead of peers who have larger SME footprints.
• Asset quality remains an overhang, but significant provisioning cover exists.
• Dividend caps continuing to 2021E remains a strong likelihood, but DBS’ absolute dividend policy provides better visibility than peers.
• We have rolled forward and raised our multi-stage DDM Target Price to S$24.63. Maintain BUY.

Underlying Business Resilience

• DBS' management is seeing strong V-shaped improvements in its operating economies in North Asia. Recall these contribute one-third of PBT.
• Management expects loan momentum to accelerate going forward. We estimate total loans to grow 8% y-o-y with risks on the upside.
• 3Q20 fee income saw a 17% q-o-q increase led by wealth and credit cards. These drivers should strengthen as economic activity picks up.
• NIMs may likely remain an overhang from low rates and excess deposit liquidity (3Q LD ratio 83% vs. 89% past 3-years).
• Nevertheless, we believe DBS’ large corporate client mix & wealth franchise should benefit from macro recovery ahead of peers that are SMEs biased. Plus its North Asia presence should benefit from North-South supply chain reconfigurations.

Significant Provisions. But Uncertainties Remain

• Allowances have increased 30% since 4Q19 with 56% of the mix in GP. The group now has a NPA coverage of 107% (200% after deducting collateral). Management claims visibility remains low on moratorium loans in terms of NPL impact once support schemes wear off. It is conducting cash flow forecasting on these accounts using AI and machine learning to keep ahead of any potential risks.
• While credit charge guidance is unchanged (100-130bps 2020-2021) we believe most will be frontloaded in 2020E (83bps) and it will fall to 33bps next year to reach midway of guidance. 2022E charges should also remain elevated, from potential spill overs of NPLs.

Upgrade DBS' Target Price to SGD24.63. Maintain BUY

• Better non-interest income and lower than initially estimated credit charges from 2021E onwards sees us upgrading DBS' 2020-2021E PAT by 4-16%. Not all these improvements may flow to yields as we expect dividend caps to remain in 2021E.
• We roll forward our multi-stage DDM Target Price to SGD24.63 (COE 10.3%, 3% terminal).
• Maintain BUY.

Source: Maybank Kim Eng Research - 5 Nov 2020