• Robust wealth income will be key in driving double-digit fee income growth in FY21F. A healthy pipeline of loan growth ( ~8% y-o-y) should help bolster NII.
• Aside from model-led credit cost reductions, DBS has ~S$1bn in management overlays to be written back (timeline dependent on moratorium risks).
• Reiterate ADD on DBS. The lifting of MAS’s dividend cap is a key re-rating catalyst.

Robust Non-II Growth Trajectory; We Expect ~12% ROE for DBS in FY21F

• DBS Group (SGX:D05) had all cylinders firing in 1Q21 — robust wealth management income (+50% q-o-q, +29% y-o-y) from strong investor sentiment amid the low rate environment, rising customer treasury activity (treasury income: +101% q-o-q, +12% y-o-y), a strong rebound in loan growth momentum (+4% q-o-q) and an extra S$190m lift from impairment write-backs.
• A pick-up in regional GDP growth underlines DBS’s confidence in achieving double-digit fee income growth in FY21F (FY20: flattish) and visibility of mid-to-high single-digit loan growth. We think that an improvement of ROE to ~12% in FY21F (FY20: 9%) is justified, given its robust non-II growth trajectory, offsetting NII weakness.

Impairment Write-back Bullet of ~S$1bn to Come

• DBS’s impairment write-back was a key positive surprise factor in 1Q21’s net profit beat. This came entirely from asset quality improvements feeding into its ECL model, stemming from a rise in repayments (e.g. from better business cashflows, having raised funds in the bond markets) or an upgrade of customer risk ratings.
• FY20 pre-emptive impairments ~S$1.3bn in management overlays — to account for provisioning risks owing to loan moratoriums declared last year — an additional amount yet to be released from DBS’s buffers. Taking into account capital needs (as general provisions feed into Tier-2 capital calculations), ~S$1bn of this could be written back when residual risks from the moratoriums taper off — we believe this to be an earnings boost to come.

DBS Is Still on the Look-out for Meaningful Acquisitions

• Operating metrics of Shenzhen Rural Commercial Bank (SZRCB) are encouraging the sale of Citi’s consumer businesses, DBS views its Citigold and credit card franchises to be a good fit. Of the 13 markets up for sale, we think India, Indonesia, and Taiwan offer the best value to DBS, given its geographical exposure. A meaningful acquisition could improve capital efficiency to ~12.5-13.5%.

Reiterate ADD, With GGM-based Target Price of S$32.64

• We raise our DBS's FY21-23F earnings per share forecast by quality metrics (lower NPA formation, rising repayments) make a case for lowering our credit costs estimates to ~16bp (from ~26bp) in FY21F (we assumed steady-state-specific provisions).
• Although DBS trades at a premium to peers at 1.4x FY21F P/BV, we see more value enhancement going forward as its revenue drivers scale new highs.

Takeaways From DBS's 1Q21 Results Briefing

• DBS recorded a loan growth of 4% q-o-q in 1Q21. At DBS’s results briefing, management said growth was broad-based —
  • ~S$3bn for a liquidity drawdown,
  • ~S$2bn in trade finance (mostly commodity and manufacturing),
  • ~S$1bn in housing loans, and
  • the rest were non-trade corporate loans and loans related to the wealth management segment.
• To this end, DBS had revised its loans in Hong Kong (mostly large corporates) remain under extended moratorium terms. The S$190m in GP writeback in 1Q21 came from better repayment trends and risk upgrades feeding into its ECL model.
• Apart from more ECL-model-related writebacks, DBS had ~S$1.3bn in management overlays that were previously set aside as pre-emptive impairment buffers in FY20. Realistically, this presents an opportunity to release ~S$1bn in impairments in time to come (taking into account tier-2 capital needs) — providing an earnings boost when this happens.
• Operating metrics of Shenzhen Rural Commercial Bank (SZRCB) are encouraging, with steady profitability (+11% CAGR in FY15-20), contained asset quality (NPL: 1.1%) and strong 14.4% CAR. The value of this acquisition lies in the potential to deepen DBS’s Greater Bay area strategy by levering on DBS’s digital capabilities to tap SCRZB’s local network.
• Meanwhile, the integration of Lakshmi Vilas Bank has advanced DBS India’s growth of gold-backed loans and lowered its deposit costs. Legacy NPAs have also reduced.

Re-rating Catalysts and Downside Risks

• Re-rating catalysts are a lifting of the MAS’s dividend cap on banks and a rise in Fed rates.
• Downside risks are a new wave of COVID-19-related lockdowns, leading to movement restriction orders and, consequently, reduced business volumes and asset quality deterioration.

Source: CGS-CIMB Research - 30 Apr 2021