The Positives

+ Record NIM in 1Q19 broke new high in 2Q at 1.91%. NIM rose 6bps YoY and 3bps QoQ to 1.91% due to stronger than anticipated hold up of SIBOR and HIBOR, combined with higher push-through of loan repricing. We expect modest headwind impact from potential US interest rate cuts in 2H19 and DBS guided that each 25bps fed rate cut in 3Q and 4Q could translate into a 1bps and 1-2bps NIM contraction respectively. However, DBS built up some longer-term positions and a similar lag repricing effect of lower interest rates should provide some buffer. We previously expected a couple more quarters of NIM expansion from 1Q’s 1.88% before reaching 1.90%. However, with a strong 2Q NIM, we believe NIM has reached its peak this quarter and would contract from 3Q onwards. We lower our NIM forecast for 2019 and 2020 NIM to 1.89% & 1.88% respectively.

+ CIR well contained, improving 2p.p. to 42%. Positive JAWS resulted in improvement in CIR with well-managed expenses. We expect full-year CIR to be higher at 43% due to seasonality movements with staff costs and 2H CIR to be slightly higher.

+ Rebound in other non-interest income by 87.9% YoY. Trading income rose 57.3% to $357mn while gains on investment securities quadrupled to $131mn from a low base. Compared to the previous quarter, non-interest income was little changed as a decline in trading income was offset by higher gains on investment securities.

The Negatives

– A moderate rise in GP with a net increase of $57mn QoQ to reflect heightened economic uncertainty and geopolitical tensions. DBS took a more conservative stance this quarter by building up some GP due to the overall uncertainty in the environment. Due to the ultra-conservative stance DBS made over the years, there is potential upside in the next 1-2 years with opportunities to sharpen some of the cumulative allowances made as well as possible recoveries.

– Gross customer loans grew 3.70% YoY to $355bn, the slowest in 3 years. The growth this quarter was driven by corporate non-trade loans from broad-based activities across the region offset by the continued decline in housing loan growth. Some of the drawdown in the loans pipeline did not materialize due to uncertainties in the environment resulted in slower loan growth. DBS guided for some pick up in trade loan growth in 2H19 due to festive seasonality and new mortgage bookings in 2Q to translate to more drawdowns in 3Q onwards. DBS maintains a mid-single-digit loan growth guidance for 2019.

Investment Actions

Maintain ACCUMULATE at a lower target price of S$27.60. Our TP is based on target price-to-book of 1.4x, derived from the Gordon Growth model (long term ROE assumption: 12.5%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%). We toned down terminal growth from 2.5% to 2.0%.

Dividend yield support. We forecast FY19 DPS of $1.20, giving a 4.5% dividend yield support.

Source: Phillip Capital Research - 30 Jul 2019