• DBS’s guidance that FY21 credit cost will be capped at S$0.5bn and the interim dividend of S$0.33 should keep share price positive in the near term.
• DBS's 2Q21 earnings were a beat, thanks to lower credit costs and opex. Total income & PPOP were in line. Fee income normalised from a 1Q21 high base. GP writeback of S$85m (1Q21: S$190m) resulted in total impairments of only S$79m (or 8bp) in 2Q21, similar to 1Q21, which saw credit cost of 1bp.

DBS's 2Q21 Net Profit Beat Estimates on the Back of S$85m GP Writebacks

• DBS (SGX:D05)’s 2Q21 net profit of S$1.7bn (-15% q-o-q, +37% y-o-y) was 6%/18% above our/consensus estimates of S$1.6bn/S$1.5bn.
• The beat was primarily due to a S$85m writeback of general provisions (GP), resulting in total impairments of only S$79m (- 8bp) in 2Q21. 1H21 net profit formed 57%/58% of our/consensus full-year forecasts.
• DBS declared interim dividend of S$0.33 per share for 2Q21 (no scrip). We project DBS to declare S$1.08 dividend for the full year of FY21F.

Fee Income Normalised, Albeit Still Resilient; NIM Lower

• DBS's NIM drifted 4bp lower to 1.45% in 2Q21 (1Q21: 1.49%) as the tail-end of repricing filtered CTI was slightly higher at 43% in 2Q21 (1Q21: 41%).
• DBS recorded total allowances of S$79m in 2Q21, translating into 8bp credit costs (1Q21: S$10m or 1bp). This was largely due to writeback of general provisions of S$85m. Loan SPs alone were 14bp (S$164m), much lower than 1Q21’s 21bp.

Revision of Management Guidance; Credit Cost Capped at S$0.5bn

• DBS upgraded its full-year loan growth guidance to high single-digit (previously mid-to-high single-digit). The bank forecasts full-year fee income growth to be in the mid-teens (previously double-digits).
• Management also not likely to exceed S$0.5bn (previously S$1bn).

Valuation and Recommendation

• We retain our ADD call and target price of S$28.35 for DBS, still based on GGM.

• Rerating catalysts are quicker-than-expected regional economic reopening.
• Downside risks include severe asset quality deterioration from a new round of COVID-19 lockdowns.

Source: CGS-CIMB Research - 5 Aug 2021