3QFY13 results review
DBS' 3QFY13 net profit of SGD862m (+1% y-o-y; -3% q-o-q) was in line with our and consensus  expectations.  Its  9MFY13  net  profit  stood  at  SGD2.7bn  (+4%  y-o-y), accounting for 75% of our and consensus full-year net profit estimates. 3QFY13 net interest income (+6% y-o-y; +2%  q-o-q)  continued to be  well-supported by  the  expansion  in  loan  base,  up  19%  y-o-y  and  3%  q-o-q.  NIM  was  marginally lower  q-o-q  at  1.6%  (-2bps  q-o-q;  -7bps  y-o-y),  but  generally  still  within management's  expectation.  During  the  quarter,  DBS  had  taken  steps  such  as hedging,  paring  down  of  its  longer-end  book  and  bulking  up  its  USD  liquidity,  in anticipation that  the US Fed would start to taper quantitative easing (QE). As such, average asset yield fell 4bps q-o-q,  with yields on investment securities down 11bps q-o-q (+41bps y-o-y). Loan yields were also lower (-4bps q-o-q; -20bps y-o-y) due to lower  corporate  and  trade  loan  spreads.  In  mitigation,  average  funding  cost  was lower by 2bps q-o-q (-9bps y-o-y), as the build-up in USD deposits allowed DBS to shed costlier SGD fixed deposits.

Non-interest income, not surprisingly,  shrank  20% q-o-q. This was a reflection of  the tougher  market  conditions  during  the  quarter,  which  led  to  a  44%  q-o-q  drop  in trading income while market-related fee income  slipped  26% q-o-q.  Y-o-y, however, 3QFY13  non-interest  income  improved  11%  and  fee  income  grew  19%  on  higher contributions  from  trade  and  transaction  services  and  wealth  management,  while trading income rose 13% due to higher trading gains and higher treasury customer flows. With the  q-o-q drop, non-interest income  contribution  declined to 34.6% from 40.1%  in  2QFY13,  but  still  higher  than  the  33.5%  recorded  in  3QFY12.  3QFY13 operating income growth  also  largely mirrored the growth in non-interest income, ie down 7% q-o-q but up 7% y-o-y.

Overheads  remained  well-contained, down 4% q-o-q (a  broad-based  decline) while the  y-o-y  rise  was  capped  at  5%.  Thus,  y-o-y,  DBS  still  enjoyed  positive  jaws,  as operating income growth outpaced growth in expenses, leading to CIR improving y-oy to 44.1% (3QFY12: 45%). Q-o-q, CIR was higher vis-à-vis 2QFY13's CIR of 42.7%, but this was expected due to softer operating income levels.

3QFY13  loan  allowances  fell  38% q-o-q  on  the  back  of  lower  specific  and general allowances,  but  surged  175%  y-o-y  due  to  a  combination  of  normalising  specific allowance  charge-offs  from  the  exceptionally  low  levels  last  year  and  strong  loan growth  (higher  general  allowances).  Specific  allowances/loans  stood  at  15bps  of loans (3QFY12: 7bps; 2QFY13: 22bps). With higher loan allowances, y-o-y net profit growth stood at a more muted 1%, while net profit fell 3% q-o-q.

3QFY13 gross loan growth continued to moderate to +3% q-o-q (+19% y-o-y, due to the base effect) vs 2QFY13's  +5% q-o-q (+14% y-o-y),  although this was expected. Q-o-q  growth  was  largely  driven  by  trade  loans  and  secured  consumer  loans. Annualised gross loan growth was 20%. DBS guided for 4QFY13 loan growth of  2%, which would bring 2013 loan growth to the mid-high teens mark. Looking  ahead  to  2014,  management  guided  for  loan  growth  of  8-10%,  with  the slowdown partly due to a moderation in mortgages. The property cooling measures have resulted in new mortgage bookings slipping 30% from a year ago. Meanwhile, total customer deposits broadly kept pace with loan growth,  up 3% q-o-q (+13%  y-o-y)  and  hence,  group  loan-to-deposit  ratio  (LDR)  was  broadly  stable  at 89.5%  (2QFY13:  89.8%;  3QFY12:  85.2%).  however,  there  was  a  shift  in  deposit composition  in the  currency mix,  with USD deposits rising 24% q-o-q (+28% y-o-y) while  SGD  deposits  fell  2%  q-o-q  (+5%  y-o-y),  as  DBS  sought  to  build  up  USD liquidity.  Consequently,  USD  LDR  declined  q -o-q  to  133%  from  161%  at  end-2QFY13,  while SGD LDR inched up to 72.5% from 70.5% at end-June 2013. Going forward, management believes the QE tapering will likely be pushed back to 2014.

Thus, DBS would be willing to allow its USD LDR to rise back up in the near term and is  comfortable  with  a  150-160%  LDR.  Current  account,  savings  account  (CASA) growth was slower at 2% q-o-q (+10% y-o-y), resulting in group CASA ratio declining to 58.4% from 59.4% at end-June (end-3QFY12: 59.7%). Absolute gross non-performing asset (NPA)  rose  3% q-o-q (+8  y-o-y)  on the back of higher  new  NPAs  during  the  quarter  of  SGD291m  (2QFY13:  SGD242m;  3QFY12: SGD50m). Nevertheless, management thinks  new NPA formation is likely to level off at the SGD250m-300m range going forward. Except for the mid-cap portfolio in India, asset quality generally remained  benign.  The gross NPL ratio was unchanged q-o-q at 1.2%, and down from 1.29% a year ago. NPA coverage stood at 136% (2QFY13: 141%; 3QFY12: 134%). 

Finally,  Basel  III  CET-1/Tier  1/total  capital  ratios  rose  40-50bps  q-o-q  to 13.3%/13.3%/15.9% respectively.  This was chiefly due to lower risk-weighted assets following updates to its internal credit ratings. Thus, both total credit risk and RWA declined by 3% q-o-q, while RWA/total assets dropped by 400bps q-o-q to 58.8%. Other briefing highlights Looking ahead to 2014, DBS thinks Europe may surprise on the upside but the US economy  may  pan  out  to be weaker  than  expected.  All  in,  management  estimates mid-single  digit  bottomline  growth  for  2014,  similar  to  2013  level.  This  would  be driven  by  loan  growth  of  8-10%,  operating  expense  staying  contained  (ie  jaws positive) and stable loan provisioning. We forecast FY14 net profit growth of 7% y-oy, similar to our FY13 growth estimate. Finally, DBS is still keen on  growing  its private banking  but would only be interested in private banks with Asia-centric portfolios.

Risks
The  risks  include:  i)  slower-than-expected  loan  growth,  ii)  weaker-than-expected NIMs, iii)  weaker-than-expected capital market activities, iv)  a  deterioration in asset quality, and v) the adverse impact from rising bond yields on the securities portfolio.

Forecasts
No changes to our earnings forecasts.

Valuation and recommendation
We raise  our FV to SGD19.40  (from  SGD18.70) after we roll  forward our  valuation base year to end-2014 (previously June 2014). There  are  no changes  to our target P/BV  multiple  of  1.3x.  We  continue  to  like  DBS  for  its  stronger  earnings  growth
relative to peers while valuations are relatively cheaper as well. The bank is also less vulnerable  to  policy  changes  on  the  property  market  sector,  given  its  relatively smaller exposure to the segment. Thus, we are keeping our BUY call on the stock.

Company Profile
DBS is the largest Singapore bank by assets. It also has significant operations in HK.

Recommendation Chart

Source: OSK