DBS Group Holdings

Kim Eng on 6 Aug 2012

Sell maintained. No major surprises in 2Q12 results, which saw the group report a 2Q12 net profit SGD810m, down 13% QoQ, up 10% YoY. Results were generally within our expectation and consensus. Fundamentals remain solid but external headwinds continue to pose a risk to earnings, given its exposure to two very open economies, and since treasury income makes up about 30% of operating income. Our TP is raised to SGD13.10 (from SGD12.10) on a higher P/BV of 1.05x (from 0.97x previously) for a higher 2012 ROE of 11.1% (from 10.8%).

Loan momentum picked up in 2Q (+4% QoQ vs 1% QOQ in 1Q), with annualized loan growth of 11% in line with management’s low-teens growth guidance. Management does however caution of possible slowdown in 2H amid current external uncertainties. NIMs disappointed, declining 5 bps QoQ, but would have been stable ex-treasury/money market distortions. Further compression is expected in 2H, but to a lesser extent of 2-3 bps, largely on account of further NIM pressure from its China operations. Moreover, pricing has tightened on its trade financing loans, which grew at a more moderate annualized pace of 6% in 2Q.

Liquidity remains ample. While acknowledging a higher LDR of 89% in 2Q12, this was largely a function of a stagnant deposit base during the quarter which management believes is temporary, and a higher USD LDR of 151% vs 143% end-Mar. With a SGD LDR of just 68%, however, and the largest SGD surplus in the system which it could easily swap into USD, the high USD LDR is not a concern.

Some deterioration in asset quality but no major strain. Absolute NPLs have risen 6% over the past three quarters, but overall asset quality remains healthy, with a NPL ratio of 1.3%. Management sees no major stress across the region and is quick to point out that 40% of its NPLs are still performing. Credit costs remain benign at just 21 bps in 2Q12 vs 30 bps in 1Q12.