• DBS's management adopted an optimistic tone, expecting stable NIMs, better fee income from stronger business momentum and lower impairments in FY21F.
• Group loans under moratorium fell to 1% as at end-20 (from 5%). Provisions and opex for LVB manageable; should contribute positively in 12-24 months.
• Reiterate ADD on DBS with target price of S$28.35. Clearer repayment trends post-moratorium give confidence that the worst of asset quality concerns are over.

Starting Off the Year With Good Business Momentum in Jan 21

• DBS (SGX:D05)'s management adopted a more optimistic tone in its FY21F outlook; this stemmed from a visible rebound in business momentum across all operating markets into Jan 21, encouraging recovery of non-II towards pre-COVID-19 levels, and contained asset quality metrics.
• DBS kept FY21F NIM guidance at 1.45-1.5% (FY20: 1.62%), benchmark rates stabilised, and pinned credit costs expectations at ~S$1bn in FY21F (group loans under moratorium decreased to ~1%).
• Earnings upside could come from impairment writebacks (assuming a return to pre-COVID credit costs of ~S$700m-800m), but this would depend on sustained macroeconomic improvement, which we think is more likely from FY22F.

Investment Income as a Lever to Offset NII Weakness

• On balance, DBS's FY20 total income performance was commendable given the severe economic slowdown and interest rate decline. Total income held steady y-o-y as the 6% y-o-y dip in NII was completely offset by realising significant gains on its investment securities.
• Overall fee income was resilient (flattish y-o-y) as stronger wealth management (healthy customer risk appetite amid low yield environment) and brokerage fees compensated for weaker credit card and investment banking fees.
• Contextually, further gains of investment securities would be opportunistic depending on yield curve movements. As such, we see non-II declining y-o-y in FY21F barring favourable market circumstances.
• While we expect sequentially stable NIMs (4Q20 exit NIM: 1.48%), there may be headwinds from placing out excess funding into low-risk which drags on NIMs.

Credit Costs and Opex for LVB Taken Up Front

• Lakshmi Vilas Bank (LVB) added ~S$2.1bn in loans to DBS; this comprised S$212m in net NPAs which were fully secured. To sum up, the amalgamation of LVB necessitated S$183m in GPs and S$33m in restructuring costs.
• Retail loans (mainly secured by gold) accounted for ~40% of total performing loans while SME/corporates made up the rest.
• Further provisions or hefty opex are not expected for LVB, which is encouraging. Taking on LVB marks DBS’s transition from a digital-first strategy into a ‘phygital’ one.

Reiterate ADD on DBS With GGM-based Target Price of S$28.35

• Read-through from DBS’s 4Q20 results imply potentially weaker trading income and better-than-expected NIMs at OCBC (SGX:O39) and UOB (SGX:U11).
• We raise DBS's FY21-22F earnings per share forecasts by 3-7% to factor in asset quality positivity into credit costs.
• The lifting of MAS’s cap on dividends is season post-moratorium.

Source: CGS-CIMB Research - 11 Feb 2021