• DBS’s 2Q21 results surpassed our expectations due to growth in other non-interest income (net trading income and investment gains) and write-back in general provisions of S$85m. Management expects total provisions to be less than S$500m in 2021 and credit costs to be 18-20bp in 2022.
• New initiatives are expected to contribute revenue of S$350m in 2022. We expect DBS's dividend yield to improve from 3.8% in 2021 to 4.6% in 2022.
• Maintain BUY. Target price: S$35.80.

Dbs' 2q21 Results

• DBS (SGX:D05) reported net profit of S$1,703m in 2Q21 (up 37% y-o-y but receded 15% q-o-q), which is above our forecast of S$1,535m.
• Steady pace of loan growth. Loans expanded 6% y-o-y and 3% q-o-q in 2Q21 with broad-based growth from trade and non-trade corporate loans. Growth in non-trade corporate loans was led by drawdown in Singapore and Greater China. Net interest income fell 9% y-o-y due to severe NIM compression of 17bp y-o-y caused by lower interest rates.
• Kept surplus deposits to guard against tapering of QE. NIM narrowed by 4bp q-o-q in 2Q21 due to the deployment of surplus deposits at lower yields. Loan/deposit ratio is low at 82% and cash with central banks increased S$19.6b or 59% y-o-y. We believe this is a precaution against potential withdrawal of liquidity caused by the tapering of QE.
• Stellar fee generation despite sequential moderation. Wealth management fees grew 2% y-o-y but receded 18% q-o-q from exceptionally high levels in 1Q21. AUM expanded 13% y-o-y to S$285b. Contribution from investment banking doubled y-o-y to S$65m due to recovery in equity transactions and record fixed income issuance. Transaction services and cards were flat q-o-q. Overall, fees & commissions grew 27% y-o-y but receded 9% q-o-q.
• Other non-interest income declined 15% y-o-y to S$632m due to lower investment gains.
• Second consecutive quarter of low credit costs. NPL formation has declined to pre-COVID-19 levels. NPL ratio was unchanged at 1.5%. Credit costs were only 8bp in 2Q21, compared to 90bp last year. DBS wrote-back general provisions of S$85m due to repayment of weaker exposures and credit upgrades.
• DBS declared interim dividend of S$0.33 for 2Q21. Dividend payout ratio was a healthy 46%. Scrip dividend scheme is not applicable to the interim dividend.

Stock Impact

• DBS has upgraded its guidance for loan from new businesses. Management expects new initiatives, such as Lakshmi Vila Bank, Shenzhen Rural Commercial Bank, DBS Digital Exchange, Patior (blockchain-based wholesale payments) and China Securities JV, to contribute revenue of S$350m in 2022, representing a growth of S$200m over 2021.

Earnings Revision / Risk

• We raised our 2021 net negative impact from NIM compression.

Valuation / Recommendation

• Maintain BUY. Our target price of S$35.80 is based on 1.57x 2022F P/B, derived from el (ROE: 11.3%, COE: 7.75%, growth: 1.5%).

Source: UOB Kay Hian Research - 6 Aug 2021