• Improvement in loan growth (high single-digits), fee income (mid-teens) and total allowance guidance (below S$500m) are key positives for DBS.
• Strong 14.5% CET1 and lack of M&A target underpin dividend upside for DBS in FY21F.
• Reiterate ADD. Reassuring outlook on asset quality and large management overlay buffers (~S$1.5bn) lay the foundations for reliable business growth.

DBS the Only Bank With Earnings Outperformance in 2Q21

• DBS (SGX:D05) was the only bank to outperform our and consensus’ earnings expectations in 2Q21, having recorded a model-led writeback of general provisions (~S$85m or 8bp). Broadly, DBS’s revenue trends were consistent with what was seen across peers, with wealth management and treasury income accounting for most of the total income q-o-q decline.
• While DBS had set aside the lowest level of impairments amongst peers at 8bp in 2Q21, its NIM decline was also the steepest, falling 4bp q-o-q to 1.45% as repricing effects and lower yields from its excess deposits come through.
• On balance, DBS's 1H21 net profit was above at 57%/58% of our/consensus FY21F estimates. DBS also reinstated quarterly dividend of S$0.33 in 2Q21 – we thus pencil in S$1.17 dividend from DBS for FY21F (from S$1.08 previously).

Positive Asset Quality Outlook Backed by ~S$1.5bn Overlays

• DBS management’s view of asset quality cut our credit cost expectations to ~10bp in FY21F (from 16bp) to reflect the improved outlook.

Strong Business Momentum Supported by Solid Cost Control

• Business momentum was strong in Lakshmi Vilas Bank accounting for about ~2% pt of the opex growth (+3% y-o-y) in 1H21.

Reiterate ADD on DBS With Higher Target Price

• We raise DBS's FY21-23F earnings per share forecast by ~1-4% as we factor in lower impairments, slightly stronger loan growth (~9% in FY21F) and lower NIMs as excess deposits weigh on NII.

• While DBS maintains its stance to pay consistently high dividends in line with earnings, its 14.5% CET1 ratio allows for opportunistic M&A, if available. Fed rate hikes are a re-rating catalyst.
• Downsie risks are a new wave of COVID-19-related lockdowns.

Source: CGS-CIMB Research - 6 Aug 2021