DBS Group - Saving the best for last

■ 3Q15 results beat estimates, supported by benign asset quality

■ Management sees 6% loan growth, low credit costs for 2016

Reiterate Buy (1), but lowering our EPS forecasts and TP

What's new:
DBS announced its 3Q15 results on 2 November and held a briefing for analysts. We reiterate our Buy (1) call on DBS as its results were arguably the most encouraging, while guidance from management (CEO Piyush Gupta) was probably the most upbeat in the sector.

What's the impact:
Its 3Q15 net profit of SGD1,066m was 7% higher than our estimates and 8% higher than consensus. DBS was the only Singapore bank to achieve a QoQ growth in its net-interest margin (NIM), which rose QoQ from 1.75% to 1.78%. Trading income included a SGD50m one-time funding valuation adjustment charge related to the fair value of derivatives.

A major factor behind the better-than-expected results was lower-thanexpected credit costs. DBS reported annualised loan-specific provisions of 20bps and overall credit costs of 25bps, considerably lower than our forecast of 39bps. The NPL ratio was unchanged QoQ at 0.9%. In constant-currency terms, loan growth was 3% YoY and -1% QoQ.

Management sees underlying loan growth of 6% for 2016, fuelled by the corporate sector and demand for refinancing. Moreover, a possible catalyst would be the positive impact from stimulus measures in its major markets.

After scrutinising and stress-testing (over a 2-year horizon) its total exposures (both on and off balance sheet) to the commodities (SGD21bn) and oil and gas (SGD22bn) sectors and the China market, management said it was ‘quite comfortable’ with its exposures and sees no signs of stress. Management expects loan-specific credit costs of 20-22bps in the coming quarter, going up possibly by a few bps into 2016.

We lower our 2016-17 EPS forecasts by 5-6% on the assumption that local interbank rates will only rise significantly from current levels from 2017. DBS management also does not expect interest rates to go up significantly in 2016. In line with our EPS-forecast cuts, we lower our 12-month target price, derived from the warranted equity method approach, to SGD22.10 (from SGD23.60).

What we recommend:
We reiterate Buy (1) on DBS’s industry-leading EPS growth.

Risks to our call: a severe economic downturn in Singapore and Asia or a prolonged delay in interest-rate and interbank-rate hikes.

How we differ:
Our revised EPS forecast for 2016 is now 7.6% lower than that of the Bloomberg consensus, due to our assumption of subdued interbank rates for most of 2016. (Read Report)

Read Related Reports
1) DBS Group - 3Q15: Mixed underlying results; new NPA formation remains high by Credit Suisse Asia Pacific Equity Research, published on 4 November 2015

2) DBS Group Holdings Ltd - A NIM-ble leader by KGI Fraser Research, published on 3 November 2015

3) Idea Of The Day - DBS Group Holdings by Lim & Tan Research, published on 3 November 2015

4) DBS Group - Currency Impact by Maybank Kim Eng Research, published on 3 November 2015

5) DBS Group Holdings Ltd - Analyst Briefing Key Takeaways by Phillip Securities Research, published on 3 November 2015

6) DBS - Asset Quality Holding Up Well by RHB Research, published on 3 November 2015

7) DBS Group - Slower IB-related fees, no NPL red flag yet‏ by CIMB Research, published on 2 November 2015

8) DBS Group - Wrapping up 3Q15 results season with a bang by Daiwa Capital Markets, published on 2 November 2015

9) DBS Group Holdings Ltd - 3Q15 results: Another resilient set; Key mgt briefing takeaways by Deutsche Bank Markets Research, published on 2 November 2015

10) DBS Group - Buy: It was an extremely resilient 3Q15 by HSBC Global Research, published on 2 November 2015

11) DBS - Cutting FV to S$21.35‏ by OCBC Investment Research, published on 2 November 2015

Source : Daiwa Capital Markets

Labels: ,