Summary: DBS Group Holdings posted above expectation 3Q net earnings of S$856m, up 12% YoY or 6% QoQ. The main variance being the sharply lower provisions, which fell by a drastic 76% YoY or 47% QoQ to S$55m in 3Q12. While business challenges remain and management highlighted the weakness from China in 3Q, CEO Piyush Gupta also indicated that the worst appeared to be over, based on the bottoming out of China data. We have adjusted our FY12 earnings to take into account lower provisions, raising our FY12 earnings from S$3252m to S$3385m. Overall, we remain cautious about the outlook for Asia and mindful of the present weak market sentiment which will rein in valuation. We are maintaining our fair value estimate of S$15.94 and our BUY rating.
Stronger-than-expected 3Q
DBS posted 3Q net earnings of S$856m, better than consensus estimate of S$801m (based on Bloomberg). While Net Interest Income rose 10% YoY to S$1332m, the main variance for the better bottomline was due to a sharp decline in allowances for credit and other losses. This fell by a drastic 76% YoY or 47% QoQ to S$55m. Net earnings for the 9-month period came in at S$2599m, up 13%. Net Interest Margin continued on the downtrend for another quarter, down from 1.77% in 1Q12 and 1.72% in 2Q12 to 1.67% for this quarter. This was due to increased deposits which were deployed into less attractive interbank assets. In addition, lower deposit yields from China also dragged down margin. The QoQ increase in Fee & Commission Income was due to a sharp rise in Investment Banking contribution, up from S$29m in 2Q12 to S$60m in 3Q12.
Focus – Wealth, SME, GTS, Fixed Income & REITs
While business challenges remain and management highlighted the weakness from China in 3Q, CEO Piyush Gupta also indicated that the worst appeared to be over, especially based on the bottoming out of China data. For several of its key focus areas, income is still healthy and on track. Wealth Management posted a 33% increase in 9M12 income to S$201m. SME generated a 16% rise in income to S$301m. Income from Global Transaction Services (GTS) grew 44% to S$342m. Management also emphasized its intention to grow its Fixed Income pie, extending its reach into more non-SGD bonds. However, management also warned of possible headwinds from China. This was already seen in 3Q, with a drop in trade financing in China and margin compression.
Maintain BUY and FV of S$15.94
We have adjusted our FY12 earnings to take into account lower provisions, raising our FY12 earnings from S$3252m to S$3385m. While earnings are higher, we remain cautious about the outlook for Asia (which is likely to continue to cap margin) and mindful of the present weak market sentiment which will rein in valuation. We are maintaining our fair value estimate of S$15.94 and our BUY rating.
DBS posted 3Q net earnings of S$856m, better than consensus estimate of S$801m (based on Bloomberg). While Net Interest Income rose 10% YoY to S$1332m, the main variance for the better bottomline was due to a sharp decline in allowances for credit and other losses. This fell by a drastic 76% YoY or 47% QoQ to S$55m. Net earnings for the 9-month period came in at S$2599m, up 13%. Net Interest Margin continued on the downtrend for another quarter, down from 1.77% in 1Q12 and 1.72% in 2Q12 to 1.67% for this quarter. This was due to increased deposits which were deployed into less attractive interbank assets. In addition, lower deposit yields from China also dragged down margin. The QoQ increase in Fee & Commission Income was due to a sharp rise in Investment Banking contribution, up from S$29m in 2Q12 to S$60m in 3Q12.
Focus – Wealth, SME, GTS, Fixed Income & REITs
While business challenges remain and management highlighted the weakness from China in 3Q, CEO Piyush Gupta also indicated that the worst appeared to be over, especially based on the bottoming out of China data. For several of its key focus areas, income is still healthy and on track. Wealth Management posted a 33% increase in 9M12 income to S$201m. SME generated a 16% rise in income to S$301m. Income from Global Transaction Services (GTS) grew 44% to S$342m. Management also emphasized its intention to grow its Fixed Income pie, extending its reach into more non-SGD bonds. However, management also warned of possible headwinds from China. This was already seen in 3Q, with a drop in trade financing in China and margin compression.
Maintain BUY and FV of S$15.94
We have adjusted our FY12 earnings to take into account lower provisions, raising our FY12 earnings from S$3252m to S$3385m. While earnings are higher, we remain cautious about the outlook for Asia (which is likely to continue to cap margin) and mindful of the present weak market sentiment which will rein in valuation. We are maintaining our fair value estimate of S$15.94 and our BUY rating.
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