DBS' 1QFY13 net profit of SGD950m (+2% y-o-y; +25% q-o-q, ex-divestment gains) was ahead of expectations, accounting for 27%-28% of our and consensus full-year estimates. The key variance was mainly stronger-than-expected non-interest income, which came from both fee as well as trading income. More positively, we note that the growth was largely from the annuity and flow-related businesses, which tend to be recurring in nature.

1QFY13 net interest income (-1% y-o-y; +3% q-o-q) was well supported by robust loan growth, up 13% y-o-y and 6% q-o-q. Meanwhile, NIM was up 2bps q-o-q to 1.64%, helped by the rise in LDR (see below). There was some downward pressure on asset yield (-2bps q-o-q), which came mainly from the strong growth in short-term, lower-yielding trade finance. Yields in Singapore, however, held up well. The pressure on yield was cushioned by lower funding cost (-4bps q-o-q) as DBS shed some of its high-cost USD and SGD fixed deposits. Y-o-y, NIM was down 13bps mainly due to lower asset yield (-11bps y-o-y) following the decline in loans and securities yields.

Overall, Management thinks NIMs may not slip too much from the current level, ie up to 4bps downside. DBS thinks the recent rise in mortgage lending rates would help hold margins domestically. Margins in Hong Kong have also been on the rise (1QFY13: 1.55% vs 1QFY12: 1.34%; 4QFY12: 1.55%), which Management said was structural in nature.

DBS enjoyed a strong quarter for non-interest income (+21% y-o-y; +49% q-o-q, ex-divestment gains). Fee income rose 25% y-o-y and 36% q-o-q, backed by: i) stronger capital market activities with stockbroking fees up 19% y-o-y (+41% q-o-q), while investment banking fees doubled y-o-y (+>100% q-o-q), ii) better contribution from annuity businesses, especially wealth management (+43% y-o-y; +47% q-o-q), and iii) stronger loan-related fees (+24% y-o-y; +47% q-o-q), in tandem with the loan growth. Meanwhile, DBS' net trading income jumped 40% y-o-y (+204% q-o-q), largely driven by higher customer flows for treasury products, which were up 17% from a year ago and doubled from 4QFY12. Opportunistic trading gains were also higher. With the stronger non-interest income, DBS registered healthy operating income growth (+8% y-o-y; +18% q-o-q, ex-divestment gains) while non-interest income contribution increased to 42.7% (1QFY12: 38%; 4QFY12: 34%). Going forward, DBS said its capital market pipeline was robust, although some seasonality is likely to set in ahead as well (for trade-related income).

Overheads were generally under control, up 6% y-o-y and 1% q-o-q, mainly due to higher staff costs. However, with the stronger income growth, CIR improved to 41.1% from 41.7% in 1QFY12 (4QFY12: 48.1%), while pre-provision operating profit rose 9% y-o-y (+34% q-o-q). 1Q CIR tends to be lower and management's guidance for a flat CIR y-o-y suggests that CIR is likely to rise to an average of around 46% in the quarters ahead. 

The main dampener in the 1Q results was loan allowances, which expanded 55% y-o-y and 96% q-o-q. That said, part of the rise was due to higher general allowances (+29% y-o-y; >134% q-o-q) that was required to be set aside due to the strong loan growth. Specific allowances were also higher (+165% y-o-y; +44% q-o-q) and stood at 21bps of loans (1QFY12: 9bps; 4QFY12: 15bps). The rise in specific allowances was for its legacy portfolio and mainly related to regions in South and Southeast Asian and the rest of the world.

Notwithstanding the higher loan allowances, the stronger pre-provision operating profit was sufficient for DBS to chalk up a record net profit of SGD950m (+2% y-o-y; +25% q-o-q). ROE also improved to 12% (FY12: 11.2%).

Meanwhile, total customer deposits expanded by an annualised pace of 13% (+8% y-o-y), led by SGD and HKD deposits, as well as onshore and offshore CNY deposits. Current account and savings account (CASA) growth was strong an annualized 18% (+12% y-o-y), but fixed deposit balances were flat q-o-q as DBS shed more expensive fixed deposits. These helped push group CASA ratio to 60.9% at end-Mar 2013 (end-2012: 60.3%).

With loan growth outpacing deposit growth, group LDR rose q-o-q to 89.3% from 86.8% at end-2012. SGD LDR was 69%, up from 64% at end-2012 while USD LDR rose further to 165.4% (1QFY12: 142.9%; 4QFY12: 146.1%). DBS was comfortable with the rise in group LDR and will likely keep the LDR at current levels. Also, Management highlighted its preference to match the strong growth in trade finance with wholesale funding, given the lower funding cost (vs fixed deposits).

Asset quality was broadly q-o-q stable with non-performing asset (NPA) at SGD2.77bn (-5% y-o-y) while the gross non-performing loan (NPL) ratio was 1.2%, unchanged from end-2012 (1QFY12: 1.3%). Allowance coverage was 142%, also stable q-o-q but up from 128% at end-1QFY12.

Finally, DBS disclosed Basel III CET-1/tier 1/total capital ratios of 12.9%/12.9%/15.5% respectively. Tier-1 and total capital ratios were 14% and 17.1% respectively as at end-2012, based on Basel II. The q-o-q drop was mainly due to asset growth plus higher risk weights due to exposure to financial institutions and OTC derivatives, but cushioned by the full recognition of revaluation surplus on all available-for-sale (AFS) securities as CET-1.

Following the better-than-expected numbers, we have raised our FY13-14 net profit projections by 5%-5.5% p.a. The main revisions are: i) FY13 loan growth assumption of 12%, from 9%, and ii) 8%-9% upward revision to our FY13-14 non-interest income projections, mainly for more optimistic fee income growth prospects.

We have raised our fair value to SGD18.70 from SGD17.20, which takes into account the following: i) earnings revisions above, ii) upgraded target 1-year forward P/BV multiple of 1.3x (from 1.25x previously). This is in lieu of the ample liquidity following easy monetary policies globally, which is positive for riskier assets, and ii) a roll-forward in our book value to June 2014, from Dec 2013. DBS has enjoyed a solid start to 2013, backed by a strong pick-up in business momentum. We believe the numbers and the higher revised guidance above should be positive for sentiments towards the stock. Meanwhile, valuations remain decent, relative to peers. Thus, maintain BUY.

Source: OSK