DBS kept at 'buy' on continued NIM rise, better trading income and improved credit costs

SINGAPORE (May 2): Jefferies, CGS-CIMB Research and RHB Research are maintaining their “buy” call on DBS Group Holdings while OCBC is downgrading the stock to “hold”.

DBS posted 1Q19 net earnings of $1.65 billion, up 9% y-o-y which is better than consensus expectations of $1.48 billion based on Bloomberg estimate.

NIM (Net Interest Margin) improved from 1.83% in 1Q18 to 1.88% in 1Q19 but management seems certain NIM will improve this year as last year’s rate increases have not fully flow through into FY19.

Management is also retaining its full year guidance for mid-single digit loans growth.

“We expect fee income to pick up this year as better market outlook and activities will usher in more IPOs and corporate actions,” says OCBC analyst Carmen Lee in a an Apr 30 report.

Since OCBC’s March 26 report on Singapore’s banking sector where the research house reiterated its “overweight” rating for the sector, the sector has done well.

Based on the FTSE ST Financial Index (FSTFN), gains for the same period was 7.0%, while the three banking stocks appreciated an average of 11.6% during the same one-month period.

DBS in particular, moved up from $25.12 to $28.40.

As the share price is now close to OCBC’s revised fair value target of $29.18, “we downgrade from ‘buy’ to ‘hold’ and will turn buyer at $27.50 or lower,” says Lee.

On the other hand, RHB says DBS is still a “buy” after revising its target price from $28.80 to $29.60, implying 1.43 times 2020F book value and giving 10% upside plus 4% FY19F yield.

This is because RHB believes its long-term ROE assumption of 13.5% vs 2018’s 12.2% is achievable given greater NIM expansion in 1H19 on top of digitisation-driven cost efficiencies.

“Digitisation efforts could contribute to further ROE enhancement over the next few years,” says analyst Leng Seng Choon.

Management has also guided for 2019 NIM to be 4-5bps wider vs 2018’s.

“The March mortgage rate rise will likely raise NIM from 2Q19 onwards,” adds Leng.

And while home mortgage growth is weak, growth from business lending is expected to stay respectable with management guiding for mid-single digit 2019 loan growth and RHB’s forecast is 5%.

“Our target price is raised by 3% to $29.60 as we roll over our P/BV valuation to 2020F,” says Leng.

Agreeing, Jefferies analyst Krishna Guha said protracted credit cost normalisation, improving RoE trajectory, yield and the ongoing “beat-and-raise” cycle will likely support DBS’s outlook despite premium valuation.

Guha noted growth on the year was driven by higher business volumes and margins while sequential growth was driven by higher non-interest income and lower credit costs.

Specifically, he noted it was DBS’s non-trade corporate loans in manufacturing, building and construction that drove business volumes in 1Q19 as trade loans were weak due to unattractive pricing while mortgage volumes declined on back lower refinancing volumes.

In addition, 1Q19 NPA (non-performing asset) declined sequentially and on the year due to lower new NPA formation while gross NPL (non-performing loan) ratio was also unchanged at 1.5%.

“We raise loan growth to 7% as we expect targeted easing and delayed rate hikes to benefit loan demand,” says Guha who is lowering DBS’s credit cost estimates to 21 bps from 27 bps.

Jefferies is raising FY19 estimate by 5% and raise price target by 10%. The price target values DBS at 1.6x FY19e book versus projected RoE of 12.5%.

Finally, CGS-CIMB is revising DBS’s EPS estimates upwards.

“While we keep our forecast of a 5bp y-o-y rise in FY19F NIM, an additional 1bp increase in NIM could lift our FY19F net profit up 0.7%,” says lead analyst Andrea Choong.

In 1Q19, wealth income rebounded to $315 million from a two-year low of $218 million in 4Q18 as client activity picked up on the back of buoyant capital markets.

Stripping off equity valuation gains, DBS recorded net new asset under management (AUM) of $1 billion for 1Q19.

Barring the $443 million 1Q19 trading income outperformance, Choong thinks DBS’s guidance of $200 million/quarter in treasury income is “a reasonable estimate given the still-uncertain macro outlook”.

She also expects the bulk of the NIM impact from its repricing exercises to come through in 2Q19F as funding pressures moderate amid the US Fed rate hike pause.

CGS-CIMB has a higher GGM-based target price of $30.00 which is 1.54 times FY19F earnings versus ROE of 13%.

As at 2.38pm, shares in DBS are down 7 cents at $27.58.