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6 Reasons Why DBS Is The Top Pick Among Banks
Aspire, Hot Picks | 07 September 2015
Related stocks:
D05
By: Lim Si Jie
Articles (169) Profile

2Q15 Performance

 

1. 2Q15: Strong Set of Results

DBS reported core net profit of $1,117 million in 2Q15 (-1.4 percent QoQ, 15.3 percent YoY). It was a better-than expected results on strong non-interest income and lower provisions. Benefits from a higher Singapore Interbank Offered Rate (SIBOR) are starting to show up in Net Interest Margins (NIM), which is up six basis points (bp) QoQ.

At the same time, NIMs was also boosted by DBS aggressively managing down surplus deposits. Out of the six bp QoQ increase, around four bp was driven by higher SIBOR and two bp from higher Loss Disallowance Rule (LDR).

Source: JP Morgan, Company Reports

While NIMs picked up this quarter, it was the only positive contributor to the net profit and was not enough to prevent the total returns from dropping by 1.4 percent QoQ. This was not received well by the market and the stock price was under pressure post results.

NIMs are likely to be maintained at current levels as management expects NIMs to remain flat around 2Q levels for the rest of 2015. Looking forward, while there is still some residual benefit from SIBOR, it might be offset by pressure on funding costs.

2H15 Outlook

2. 2H Performance Volatility: Driven By Net Interest Income

Source: UBS Estimates, Company Reports

While management is confident of a resilient performance from the core banking business in 2H, the volatility will likely be driven by capital market performance due to uncertainties surrounding the US Fed liftoff and China macro.

4Q fed rate hike now appears to be a matter of time. As a result, SIBOR/SoR are up after a lull earlier in the year. From DBS’ earnings point of view, the key discussion will move to the pace of rate hikes, rather than the lift-off date. The market is keeping Fed fund futures for sharp changes in probability in 2016, which will impact the NIM outlook for DBS.

3. Loan Pipeline for 2H15 Looks Steady

Despite the slower-than-expected loan growth in 1H15, management is confident of seeing a four percent volume growth in 2H15—most of which would be deal related. New mortgage bookings in 2Q15 were one of the highest in recent times, boosted by drawdowns and more inbound refinancing.

DBS’s new board-rate-linked packages are proving to be more popular compared to fixed rate packages, which are losing popularity amongst new borrowers. Singapore mortgage growth should continue to remain steady in the near term and the drag from a shrinking trade loan book should subside.

While SME-related Non-Performing Loans (NPLs) continue to inch up, DBS is not seeing any systemic asset quality issues in any of the markets. The commodities-related exposure is holding up pretty well. India-related NPLs have mostly peaked, but are unlikely to recover in the near term.

DBS CEO expects to see overall credit costs maintained at 20-25 basis points (bps) levels in the next few quarters. The key focus will be on ASEAN asset quality performance which will likely determine earnings trajectory and investor sentiment over the next few quarters.

4. DBS’ Loans Grew 9% YoY

Source: JP Morgan, Company Reports

 

Positive Catalysts

5. Bancassurance Deal with Manulife

DBS signed a bancassurance (selling of life assurance and other insurance products and services by banking institutions) deal with Manulife in April, worth $1.6 billion for 15 years. Similar deals at other banks (UOB with Prudential and CIMB with Sun Life) suggest that the revenue pick-up would also come from ongoing variable payments and higher bancassurance sales.

These earnings command higher multiples as they do not consume capital and have higher recurring component to it. Analysts forecast the deal to ~3-5 percent to recurring earnings.

6. Leading Digital Bank

DBS has one of the leading digital banking initiatives in the region. The bank has consistently started guiding for a more organic growth in markets like India and Indonesia on the back of its digital capabilities. Should such a move materialise, it provides a good risk-return trade-off at current levels.

Investors’ Takeaway

While DBS remains a good buy, analysts warn about the lack of cost discipline and higher-than-expected credit costs that the bank has. Furthermore, its China trade finance book and inorganic growth could prove to be downside risks as well.

Take a look at the other articles that SiJie had written on the other banks:

UOB2 Catalysts UOB is Lacking for Potential Upside

OCBC: 3 Reasons To Pick OCBC Up Now And Not Later

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

DBS Group Hldgs  25.150 +0.15 +0.60%   
Business: [FY18 Total Income] Institutional banking (43.7%), consumer banking/wealth management (42.9%), treasury markets and others (13.4%).

Insight: Apr-19, 1Q19 net profit rose 9% to a record $1.7b.... Read More


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