Towards Financial Freedom
DBS - Improved Asset Quality And Stable NIM In 2Q14
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.
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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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
