DBS

Kim Eng on 30 Apr 2012

SELL maintained. Undoubtedly a strong set of 1Q results from DBS, which surprised on the upside against our estimates and consensus. However, with the variance coming from the more volatile treasury operations and low loan loss provisions, which we see rising in the coming quarters, we raise our forecasts by a marginal 5%. Our TP is raised to SGD12.10 on a higher P/BV of 0.97x (from 0.9x) for a higher 2012 ROE of 10.8% (from 10.5%). Earnings risks persist for the three banks, and DBS is the most susceptible to external volatility, particularly since treasury income now makes up 31% of operating income, while uncertainties related to the Bank Danamon acquisition could be a drag.

Strong showing in 1Q. Net profit rose by 16% YoY (28% QoQ), making up 30% of our full-year forecast and consensus. Treasury income came in much stronger than expected while provisions were low during the period, with a credit charge rate of just 30bps vs 38bps in 4Q11. On the flip side, overheads beat expectations, up 16% YoY.

Guidance intact. Management’s guidance for low-teens loan growth this year is maintained, with an expected moderation in China trade financing lines. These loans, nevertheless, are proving quite sticky and as such, trade financing continues to grow. Management also guided for stable NIMs hereon – having improved 4bps QoQ, there is less room to push pricing on corporate loans at this stage.

Approvals pending for Bank Danamon. Management hopes to get MAS and shareholder approval over the next few months and Bank Indonesia’s (BI) approval sometime in 2H. However, BI’s governor said that the acquisition will not be approved until new ownership rules are in place in June and agreed with Singapore on reciprocity. While we believe the deal is still likely to go through, there are risks that the acquisition will drag on and DBS may not get the 80% stake that it wishes (after paring down), which could complicate management’s plans of synergising the operations of the two entities in the future.