A Better Handle on NPLs. DBS Is Poised for Growth

• DBS (SGX:D05)’s 2020E profit after tax (PAT) came in-line with MKE/Street expectations.
• Similarly, we see several upside risks operationally from loan growth, better net interest margins (NIM) from a steepening yield curve and potential realisations of investment gains.
• DBS’s liquid balance sheet positions it to leverage opportunities when the region begins to emerge from COVID-19, we believe.

Better Than Expected Asset Quality

• DBS's non-performing loans (NPL) increased 12% y-o-y in 2020 – a good reading taking the COVID-19 disruption and recession in to context. Compare this with NPLs rising 69% y-o-y during the 2016 O&M crisis.
• Moratoriums fell to 1.2% of loans compared to 5% in 3Q20 as customers mostly chose to begin repayments rather than opt for further relief. Of course, asset quality is not out of the woods yet as regional moratoriums are ongoing. Risks exists in 1H21 as these expire.

Return to Growth With Potential Upside Surprise

• In an improved asset quality outlook, Management claims DBS is past the peak in provisioning.
• We estimate credit charges to fall to 24bps in 2021E (vs 83bps 2020) – the lower range of guidance. This also opens up potential for write-backs going forward, especially given GP makes up ~60% of provisions.
• Operationally, DBS is seeing improved performance across net interest income and non-interest income in Jan 2021.
• We forecast loan growth to rebound to 7% y-o-y (vs 4% 2020) from increasing corporate demand and mortgages. Weakening NIMs given the low rate environment could be a drag (-10bps in 2021E), but there is potential to surprise on the upside from a steepening yield curve.
• DBS is also holding on to S$1.3bn of unrealised gains on investments, which can potentially be realised going forward. DBS’s loan-to-deposit (LD) ratio at 81% is the lowest since 2010 giving it ample room to capture opportunities as regional countries emerge from lockdowns and North Asia picks up steam.

Maintain BUY, But Watch for COVID-19 Risks

• Post 2020 results, we lower DBS's 2021-22E earnings per pressure and more conservative trading gains. Renewed disruptions and lockdowns due to COVID-19 remain a central downside risk.
• Our multi-state DDM (COE 9.3%, 3% terminal) target price for DBS has been adjusted to S$29.64 (from S$29.78). Figure 2 in report attached below shows the key changes to our estimates.
• Maintain BUY.

Source: Maybank Kim Eng Research - 10 Feb 2021