DBS Group Holdings Ltd

Allowances dent record operating result

04 May 2020
SINGAPORE | BANKING | 1Q20 RESULTS
 1Q20 earnings of $1.17bn missed original estimates of $1.59bn. However, pre-provision
ACCUMULATE (Maintained)
LAST TRADED PRICE SGD 19.96
operating profit (PPOP) of $2.47bn was 15% higher than previous estimates.
FORECAST DIV SGD 1.32
 $1.09bn of allowances was undertaken to build-up capital buffer from the impact of
TARGET PRICE SGD 20.59
COVID-19. Two-thirds were booked as GP while the remainder was from SP. TOTAL RETURN 9.8%
 The bank expects credit costs to increase by $3bn-5bn (80-130 bps) cumulatively over
the next two years as a result of the COVID-19 pandemic. COMPANY DATA

 1Q20 interim dividend at S$0.33 per share was maintained from the previous quarter. BLOOMBERG TICKER DBS SP
O/S SHARES (MN) : 2,539
We expect annual dividends of S$1.32, a yield of 6.4% for DBS based on our TP.
 Maintain ACCUMULATE with a downward revision in TP to S$20.60. Our FY20e MARKET CAP (USD mn / SGD mn) : 35786 / 50680
52 - WK HI/LO (SGD) : 27.89 / 16.65
earnings estimate was revised downwards by 33% after raising provision by $700mn per 3M Average Daily T/O (mn) : 8.90
quarter over the next 5 quarters and compressing NIM by 10 bps.
MAJOR SHAREHOLDERS (%)
Temasek Holdings Pte Ltd 30.2%
Results at a glance
(SGD mn) 1Q20 1Q19 YoY Comments Capital Group Cos Inc 5.0%
Vanguard Group Inc 2.5%
NIM was resilient at 1.86% for the quarter (vs. 1Q19: 1.88%)
NII 2,482 2,310 7.4%
with LIBOR under stressed funding market conditions.
PRICE PERFORMANCE (%)
Fee income continue to reach record levels on better WM fee 1MTH 3MTH 1YR
Net Fees & Comm 832 730 14.0% (+28% YoY), loan-related fees (+17% YoY) and investment
COMPANY 7.5 (21.3) (25.3)
banking fees (+64% YoY).
STI RETURN 5.80 (16.40) (19.67)
Other non-interest income grew 39% as gains were realised on
Other Non-II 712 511 39.3% investment holdings over the quarter on fixed income
PRICE VS. STI
holdings.
Total Income 4,026 3,551 13.4%
28.0
Positive JAW of 9% lowered CIR to 39% compared to 42% a
Expenses 1,556 1,498 3.9% 26.0
year ago.
24.0
Stellar operating performance provides headstart to
PPOP 2,470 2,053 20.3% 22.0
brace against upcoming periods of stress.
20.0
$1.09bn of total allowances taken pre-emptively to accelerate 18.0
Allowance 1,086 76 n.m.
build-up of reserves to combat impact of COVID-19. 16.0
May-19 Aug-19 Nov-19 Feb-20
PATMI 1,165 1,651 -29.4%
DBS SP Equity FSSTITR index
Source: Company, PSR
Source: Bloomberg, PSR

The Positives KEY FINANCIALS

+ Record PPOP of $2.48bn provides buffer amidst trying operating environment. Total Y/E Dec FY18 FY19 FY20e FY21e

income crossed record $4bn mark (+13.4% YoY) as cost discipline was maintained (+3.9% Total Inc (SGD mn) 13,183 14,544 14,744 15,496

YoY) to provide a positive JAW of 9%. CIR improved to 38.6% in 1Q20 (1Q20: 42.2%). Op Profit (SGD mn) 6,659 7,583 4,935 7,575
NPAT (SGD mn) 5,653 6,429 4,152 6,398
EPS (SGD) 2.17 2.51 1.99 2.49
Income was buoyed by robust growth across all segments. In particular non-interest income
PER, (X) 9.2 7.9 10.0 8.0
benefitted the most (+39.3% YoY) as investment gains were realised on fixed income assets
P/BV, (X) 1.1 1.0 1.1 1.1
during the quarter.
DPS (SGD) 1.20 1.23 1.32 1.32
ROE 12.3% 13.3% 8.3% 11.6%
Fee income enjoyed strong growth (+14% YoY) from WM fees (+28% YoY), loan-related fees Source: Bloomberg, Company, PSR
(+17% YoY) as well as investment banking fees (+64% YoY). Valuation Method:
Gordon Growth Model (COE: 8.4%, g: 2.0%)
NII grew 7.4% YoY on relatively stable NIM (1Q20: 1.86% vs. 1Q19: 1.88%) and loans growth
of 4% YoY as translation effect of interest rate cuts on NIM was muted in the first quarter. Tay Wee Kuang (+65 6212 1853)
Research Analyst
Strong operating results in 1Q20 is expected to hold up FY20 income levels similar to FY19 taywk@phillip.com.sg

levels as business slows in subsequent quarters. This means the bank expects income gain of
$500mn in 1Q20 YoY to be offset by lower income across the subsequent three quarters of
FY20.

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MCI (P) 006/10/2019
Ref. No.: SG2020_0053
 DBS GROUP HOLDINGS RESULTS

+ Interim quarterly dividends maintained at of 33 cents, providing an annualised yield of List of Abbreviations
WM – Wealth Management
6.6%. The bank expects current levels of dividend to be sustainable unless CET-1 levels fall
IB – Investment Banking
drastically below the targeted operating range of 12.5 – 13.5%. Current CET-1 level maintains IBG – Institutional Banking Group
at 13.9%, little changed from a year ago (1Q19: 14.1%). DBS added that dividend is guided CBG – Consumer Banking Group
by stability rather than a targeted payout ratio. NII – Net Interest Income
Non-II – Non-Interest Income
NIM – Net Interest Margin
The Negatives LDR – Loan to Deposit Ratio
- Allowances put a huge dent on earnings. In anticipation of the impact from the pandemic, NPL – Non-performing Loans
DBS has set aside $1.09bn in 1Q20 as allowances. Of which, $706mn was booked as GP as CASA – Current Account, Savings Account
O&G – Oil and Gas
economic conditions continue deteriorating. This was a stark contrast from a year ago, when
SP – specific provisions
DBS wrote-back $100mn in GP on upgrades and recoveries. The remaining amount was GP – general provisions
charged to SP, largely attributed to new account in the O&G sector identified in the quarter. AUM – Asset Under Management
We believe around S$200mn (or “more than half”) of specific allowances were made on a CIR - Cost-to-income ratio
notable oil trader.

Exposure to the O&G sector maintained at $23bn, roughly 6% of loan book. However,
exposure to traders within the sector, who are at risk from the oil price crisis stands at $5bn,
lower than 2% of overall loan exposure.

Outlook
Downward NIM pressure to kick in in subsequent quarters. Resilience in NIM in 1Q20 was
not reflective of NIM pressure ahead as LIBOR held up due to stressed funding conditions.
We have reduced FY20 NIM forecast by 10 bps to incorporate the lower interest rate cuts
environment. Conversely, DBS mentioned there is pricing power by increasing spreads
especially when competing banks start to withdraw their loans.

Credit costs to increase by 80-130 bps cumulatively over the next 2 years, amounting to
$3bn-5bn in additional allowances to be booked. We have included an additional $3bn on
top of the $1.09 booked in 1Q20 in our estimates, putting allowance at around $700mn per
quarter for the next 4 quarters.

Sufficient capital to ride through this downturn. CET1 is 13.9% Currently, cumulative GP
stands at $3.2bn, including management overlays of around $1bn. The bank’s various capital
and liquidity positions also maintain well above regulatory requirements. For more
information, please refer to Annex A.

Investment Actions
We maintain our ACCUMULATE recommendation with a lowered TP of S$20.60 (previously
$27.30). We have revised the model by considering the expected allowances of $700mn per
quarter to be booked over the next four quarters and further reducing NIM by 10 bps as
translation effect from the interest rate cuts in March.

Valuation: Gordon Growth Model

Item Description Value
Rf Risk-free rate 2.6%
E Equity-risk premium 5.5%
B Beta 1.2
COE Cost of Equity 9.3%
ROE Return on Equity 10.0%
g Terminal growth rate 2.0%

(ROE-g)/ Target Price to Book 1.09

(COE-g)
BVPS, S$ 18.9
Valuation, S$ 20.6

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 DBS GROUP HOLDINGS RESULTS

Annex A: DBS has sufficient buffer vs. Regulatory Capital Requirements

Source: DBS, MAS, PSR

Page | 3 | PHILLIP SECURITIES RESEARCH (SINGAPORE)

 DBS GROUP HOLDINGS RESULTS

Financials
Income Statement Balance Sheet
Y/E Dec, SGD mn FY17 FY18 FY19 FY20e FY21e Y/E Dec, SGD mn FY17 FY18 FY19 FY20e FY21e
Net Int Income 7,791 8,955 9,625 9,342 9,308 Cash and bal w central banks 26,463 22,185 26,362 56,258 58,631
Fees and Commission 2,622 2,780 3,052 3,389 3,808 Due from banks 35,975 40,178 39,336 40,933 42,595
Other Non int income 1,511 1,448 1,867 2,014 2,380 Govt, Bank & Corp Sec & T Bills 95,342 105,475 113,475 114,760 116,070
Total income 11,924 13,183 14,544 14,744 15,496 Derivatives 17,585 17,029 17,235 17,611 17,697
Operating expenses 5,205 5,814 6,258 6,536 6,874 Goodwill and intangibles 5,165 5,175 5,170 5,170 5,170
Provisions 1,544 710 703 3,274 1,048 Property and other fixed assets 1,233 1,450 3,225 6,371 13,295
Operating profit 5,175 6,659 7,583 4,935 7,575 Loans to non-bank customers 323,099 345,003 357,884 369,414 369,414
Associates & JVs 0 0 0 0 0 JV and Associates 783 838 835 842 849
Profit Before Tax 5,175 6,659 7,583 4,935 7,575 Other assets 12,066 13,418 15,424 14,901 14,369
Taxation 671 1,006 1,154 783 1,176 Total Assets 517,711 550,751 578,946 626,260 638,089
Profit After Tax 4,504 5,653 6,429 4,152 6,398 17,803 22,648 23,773 26,757 26,757
Non-controlling Interest 133 76 38 38 38 Deposits from customers 373,634 393,785 404,289 445,279 445,279
Net Income, reported 4,371 5,577 6,391 4,114 6,360 Derivatives 18,003 16,692 17,512 17,611 17,697
Net Income, adj. 4,371 5,577 6,391 4,114 6,360 Other liabilities 16,615 18,440 20,907 22,596 23,438
Other debt securities 40,716 45,712 57,128 57,854 58,651
Per share data (SGD) Subordinated term debts 1,138 3,599 3,538 3,538 3,538
Y/E Dec FY17 FY18 FY19 FY20e FY21e Total liabilities 467,909 500,876 527,147 573,635 575,360
EPS, reported 1.69 2.17 2.51 1.99 2.49 Shareholder's equity 47,458 49,045 50,981 51,834 61,967
DPS 1.43 1.20 1.23 1.32 1.32 Non-controlling interest 2,344 830 818 792 762
BVPS 17.85 18.12 19.17 18.54 18.38 Total Equity 49,802 49,875 51,799 52,626 62,729
Dividend Pay-out Ratio 84.4% 55.4% 49.0% 66.2% 53.0%

Supplementary items Valuation Ratios

Y/E Dec FY17 FY18 FY19 FY20e FY21e Y/E Dec FY17 FY18 FY19 FY20e FY21e
CET1 CAR 14.3% 13.9% 0.1% 9.7% 16.5% P/E (X), avg 11.8 9.2 7.9 10.0 8.0
Tier 1 CAR 15.1% 15.1% 0.1% 10.3% 17.2% P/B (X), avg 1.1 1.1 1.0 1.1 1.1
Total CAR 15.9% 16.9% 0.2% 11.5% 18.8% Dividend Yield 7.2% 6.0% 6.2% 6.6% 6.6%
Growth & Margins
Growth
Net interest income 6.7% 14.9% 7.5% -2.9% -0.4%
Net Fee and Comm Inc 12.5% 6.0% 9.8% 11.0% 12.4%
Total income 3.8% 10.6% 10.3% 1.4% 5.1%
Profit before tax 1.8% 28.7% 13.9% -34.9% 53.5%
Net income, reported 3.1% 27.6% 14.6% -35.6% 54.6%
Net income, adj. 3.1% 27.6% 14.6% -35.6% 54.6%
Margins
Net interest margin 1.75% 1.85% 1.89% 1.77% 1.72%
Key Ratios
ROE 9.9% 12.3% 13.3% 8.3% 11.6%
ROA 0.9% 1.0% 1.1% 0.7% 1.0%
RORWA 1.5% 1.9% 2.2% 1.3% 1.9%
Non-interest/total income ratio 34.7% 32.1% 33.8% 36.6% 39.9%
Cost/income ratio 43.7% 44.1% 43.0% 44.3% 44.4%
Loan/deposit ratio 86.5% 87.6% 88.5% 83.0% 83.0%
NPL ratio 1.7% 1.5% 1.5% 1.7% 1.8%
Source: Company, Phillip Securities Research (Singapore) Estimates

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 DBS GROUP HOLDINGS RESULTS

Ratings History

35.00
Market Price Target Price
30.00

25.00

20.00
Source: Bl oomberg, PSR
15.00
May-18

Aug-18

Nov-18

Feb-19

May-19

Aug-19

Nov-19

Feb-20

May-20

Aug-20

Nov-20
1
2
3
4
5

PSR Rating System

Total Returns Recommendation Rating
> +20% Buy 1
+5% to +20% Accumul a te 2
-5% to +5% Neutra l 3
-5% to -20% Reduce 4
<-20% Sel l 5
Remarks
We do not ba s e our recommenda ti ons enti rel y on the a bove qua nti ta ti ve
return ba nds . We cons i der qua l i ta ti ve fa ctors l i ke (but not l i mi ted to) a s tock's
ri s k rewa rd profi l e, ma rket s enti ment, recent ra te of s ha re pri ce a ppreci a ti on,
pres ence or a bs ence of s tock pri ce ca ta l ys ts , a nd s pecul a ti ve undertones
s urroundi ng the s tock, before ma ki ng our fi na l recommenda ti on.

Page | 5 | PHILLIP SECURITIES RESEARCH (SINGAPORE)


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 DBS GROUP HOLDINGS RESULTS

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