August 7, 2017

DBS Group Holdings (DBS) reported net profit of S$1,130m for 2Q17, up 7.5% yoy, and in line with our expectations.

Broad-based loan growth from trade, corporate and housing. Loans expanded 6.6% yoy and 1.5% qoq, driven by Singapore (+1.6% qoq) and Rest of Greater China (+10% qoq). NIM was flat at 1.74%. Singapore provided positive impact of +2bp qoq. However, Hong Kong was affected by the drop in HIBOR, especially 1M HIBOR, as a result of excess liquidity, resulting in negative impact of 2bp qoq.

Net trading income declined 3.9% yoy due to a reduction in renminbi hedging activities. Income from investment securities was also 18% lower yoy.

Continued headwinds from offshore support services. NPL ratio inched marginally higher by 1bp qoq to 1.45%, affected by higher NPLs from Hong Kong and South & Southeast Asia. Specific provisions increased 56% qoq to S$301m due to exposure to offshore support services in Singapore and Hong Kong.

DBS’ fully loaded CET-1 CAR was stable at 14%, the highest among the three local banks. Management expects loans to grow 3% in 2H17, bringing full-year loan growth to 6% for 2017. NIM is expected to improve 2-3bp in 2H17 and should average 1.75-1.76% for the year. Management guided total provisions of S$1.0b-1.1b (2016: S$1.4b). Specific provisions could creep higher due to deterioration in valuations of collaterals.

DBS has completed the review of its dividend policy and increased 2017 interim dividend by 10% from 30 to 33 cents/share. Its scrip dividend scheme is applicable to the interim dividend. DBS’ payout ratio is manageable at 37% even after the hike in dividends. The review of Basel 4 by the Basel Committee should be completed by Oct 17. Management may review its dividend policy again if capital requirements from Basel 4 are clarified and finalised.

DBS has completed the acquisition of ANZ’s wealth management business across five markets, namely Singapore, Indonesia, Hong Kong, Taiwan and China, at S$110m above book value. The acquisition would progressively add AUM of about S$20b (S$8b- 9b in 2H17). Management estimated the acquisition would contribute income of S$125m in 2017 and S$475m in 2018.

Maintain BUY. Our target price of S$24.85 is based on 1.29x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.0% (previously 9.4%), COE: 8.0%, beta: 1.1x, Growth: 1.0%). –UOB

DBS closed at: S$21.150