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DBS - Improved Asset Quality And Stable NIM In 2Q14

kiasutrader
Publish date: Mon, 04 Aug 2014, 01:28 PM
DBS' 2Q14 core earnings fell 6% q-o-q  mainly on lower trading income. More  importantly,  asset  quality  improved  and  NIM  was  stable.  We expect  a  share  price  re-rating  on  receding  concerns  over  DBS'  China exposure,  China's  improving  macro  outlook  and  the  bank's  stronger earnings  growth  relative  to  peers.  Maintain  BUY  with  a  revised  GGMderived TP of SGD21.00 (from SGD19.20), pegged at 1.4x FY15F P/BV.
 

Broadly  in  line  given  past  trends  of  stronger  1H.  DBS  achieved  a core net profit of SGD969m (-6% q-o-q) in 2Q14 and SGD2,002m (+9% y-o-y)  for  6MFY14,  making  up  51-53%  of  our  and  street  FY14F estimates. 6MFY14 earnings were supported by increases in  net interest margin (NIM) (+3bps), loan volume (+3.4% YTD) and annuity fee income (wealth management:  +19%, cards:  +7%, loan-related:  +7%).  The group declared an interim dividend/share of SGD0.28. 

Key  highlights  of  2Q14  results  were:  i)  stable  NIM  against  earlier expectations of  a  slippage,  ii) healthy growth in annuity fee income, iii) well-controlled  operating  expenses  (+1%  q-o-q),  and  iv)  asset  quality strengthened  as  gross  impaired  loans  fell  12%  q-o-q  and  loan  loss coverage  rose  13ppts  to  147%.  Credit  cost  was  also  lower  (20bps  vs24bps in 1Q14). The main negative was a 21% q-o-q drop in non-interest income  (non-II),  excluding SGD198m one-time items,  from lower trading income (-48%). 


Management guidance.  Management guided that 2H14  NIM is  likely  to be  stable,  leading  to  an  average  of  1.65%  for  FY14F  (FY13:  1.62%). With no sign of stress across its loan books and China trade loans tightly monitored, specific allowance/loans  charge  is  unlikely to  exceed FY13's 18bps.  Management  clarified  that  DBS  does  not  have  exposure  to commodity financing related to the  Qingdao port fraud.  It keeps its  loan growth  guidance  of  8-10%  for  FY14F  given  improving  macro environment in China and the US. 

Reiterate  BUY.  We  make  no  changes  to  our  forecasts,  with  core  net profit growth of 9% in FY14F and 10% in FY15F. However, we revise ourGordon Growth Model (GGM)-derived TP to SGD21.00 (from SGD19.20) as we  roll forward  our  base year to FY15F.  At SGD21.00,  the stock  is pegged  at  1.4x  FY15F  P/BV  (+1SD  historical  mean).  Reiterate  BUYgiven  DBS'  stronger  earnings  growth  relative  to  peers,  well-managed exposure to China trade loans via  tight controls and monitoring process, and receding concerns over China's macro issues.











Key Highlights From Management Briefing
 
Asset quality -  no sign of stress.  Management is not seeing any stress across all segments of its loans book.  Unlike United Overseas  Bank (UOB SP, NEUTRAL, TP: SGD26.00), which recorded a 44% q-o-q jump in impaired housing loans in 2Q14,
DBS'  impaired  mortgages  have  been  stable  at  SGD110m  (Dec  2013:  SGD112m). Management attributes this to the high level of owner-occupied mortgages  of  c.85% of Singapore housing loans.


Impaired loans from India, a main factor behind the sharp increases in impaired loans from  South  and  South-East  Asia  (up  3.9x  to  SGD800m  in  March  2014  from SGD207m in Dec 2012), have also leveled off. 


Overall, management  believes that specific allowance (SP)/loans charge would not exceed the 18bps seen in FY13. In 1H14, SP/loans charge was 14bps annualised.China exposure  tightly -controlled.  DBS' total China loan  book stood at SGD50bn as at end-June 2014,  with SGD36bn (72% of total) in trade loans and SGD14bn in non-trade loans. Approximately  92% of the trade loans consist of  export bills under Letters of Credit (LC) from the four large state banks in China.  Management clarified that DBS does not have exposure to commodity financing related to the Qingdao portfraud. 


Management does not foresee a blow-up in DBS' exposure to China as: i) it accepts Letters  of  Credit  (LCs)  from  only  the  top-tier  banks  in  China,  and  ii)  the  bank's architecture of controls and monitoring process would ensure  adequate validation ofthe underlying trade and early detection of risks.


NIM to hold at 1.65% for FY14F. Although management had expected some margin slippage  in  2Q14,  NIM  was  sustained  at  1.67%  (1Q14:  1.66%).  While  DBS  faced margin  pressures  in  Hong  Kong,  its  China  trade  margins  held  up  better-thanexpected  while  the  bank  was  also  able  to  price-up  some  of  its  Singapore  loans. Management  expects  NIM  to  average  at  1.65%  in  FY14F,  up  slightly  from  FY13's 1.62%. 


Loan growth of 8-10% for FY14F.  Management is sticking with its  earlier guidance of  8-10%  loan  growth  for  FY14F.  For  the  first  six  months,  DBS'  loans  portfolio expanded  3.4%  YTD  (6.8%  annualised),  led  by  lending  to  financial  institutions (+31.4%  YTD),  general  commerce  (+5.8%)  and  professionals  and  individuals (+13.3% YTD). In terms of lending by geography, its Hong Kong loan book (17.2% of total loans) grew 8.5% YTD while  its  Singapore portfolio (47.3% of total) rose 3.3% YTD. 


Having been cautious on China trade loans earlier this year due to macro concerns, management  expects  stronger  growth  in  trade  loans  in  2H  2014  now  that  China's economy is showing early signs of improvement.  In 1H 2014, China loans grew by  a modest 1.6% YTD (3.1% annualised).


Earnings Forecasts And Valuation
TP  revised up  to SGD21.00.  With 1HFY14 results broadly within our expectations, we are keeping our projections for a 9% growth in FY14F earnings and a further 10% improvement  in  FY15F.  Nevertheless,  our  GGM-derived  target  price  is  raised  to SGD21.00  from  SGD19.20,  as  we  roll  forward our base  year  to  FY15F.  Our  GGM valuation assumed long-term growth of 3.5%, average 3-year forward ROE of 11.1% and cost of capital of 9.1%.
Our new TP values the stock at 1.4x FY15F P/BV  (+1SD historical mean)  and 12.3x FY15F P/E (historical mean: 12.0x).


Risks
Downside risks that could impede the stock from reaching our TP are: i)  a  sharperthan-expected NIM slippage  vs  management's guidance for stable NIMs,  ii)  material deterioration  in  asset  quality,  particularly  for  its  China  trade  loans,  and  iii)  macro outlook improvement in major economies fizzling out.




























































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