• DBS (SGX:D05) maintains its credit cost guidance of S$3bn-5bn in FY20-21F as it errs on the side of conservatism.
• In 3Q20, group loans under moratorium rose slightly to S$19.2bn (2Q20: S$18.3bn, 5% of group loans). The increase came from the corporate segment (70% of total), which were mostly secured.
• Notably, DBS kept its impairment guidance due to difficulties in reasonably determining the probability of default at its exposures and consequently the rate of recovery given the challenging operating environment.
• Separately, new NPA formation edged up to S$1.6bn in 9M20 (9M19: S$724m), pushing NPL ratio to 1.6% in 3Q20. Apart from a shipping exposure in 1Q20, the corporate stress in 3Q20 was spread across a handful of exposures – consumer goods exposure in China, and a state-owned-enterprise (SOE) in Indonesia, and an oil-related exposure in Hong Kong. These exposures were well-secured with minimal specific provisions required.
• Having aggressively provisioned in 9M20 (c.50-83% of impairment guidance), we expect incremental credit costs to taper off as economic recovery picks up, and lower our DBS' FY21F credit cost estimate to 28bp (FY20F: 79bp).

DBS' NIM likely to stabilise from 4Q20F onwards as base rates bottom.

• Apart from continued downwards pressure on base rates, flush liquidity and DBS’s strategy to plough its excess funding into lower-risk placements with Monetary Authority of Singapore (MAS) had contributed to the sequential NIM decline in 3Q20.
• Apart from these, credit spreads held up. DBS’s CASA base expanded S$70bn in 9M20, comprising mainly S$ and US$. Although risk-adjusted returns of these placements with MAS are attractive given the zero risk-weights, they will remain a drag on NIM due to the lower absolute returns.
• Assuming a base case of benchmark rates having bottomed out, DBS expects NIM to stabilise at 1.45-1.5% in FY21F; we expect 1.62% in FY20F.