DBS

Kim Eng on 13 Feb 2012


Sell maintained. DBS’s 2011 results were robust with net profit up 15% YoY, but there was little surprise in the final numbers, which met our and consensus expectations. With exposure to two highly open economies, DBS’s earnings are more vulnerable to the economic headwinds that we anticipate ahead. We expect group earnings to flatten out this year, and forecast a tapering off of ROEs to 10% in 2012 from 11% in 2011. Our Sell call is maintained, with an unchanged target price of $11.50 (2012 P/BV of 0.9x).


Results within expectations. DBS’s full-year net profit hit $3b, up a normalised 15% YoY and was within expectations. 4Q11 net profit dipped 4% QoQ largely on the back of lower fee income and investment gains. The group’s tax rate was exceptionally low during the quarter (6.5%) due to higher tax-exempt income, but management took the opportunity to raise provisions, thus buffering the impact.


Some positives and negatives. Net interest margins (NIM) stabilised QoQ at 1.73%, aided in part by NIM improvement out of Hong Kong in the fourth quarter, while impairment charges have remained low. Moreover, management has been more proactive in deploying excess funds, with the group’s loan/deposit ratio now at 86%. Areas of weakness include the fact that costs are still running faster than income, while there was an uptick in non-performing loans (NPLs) due to a lumpy shipping loan.


A more sedate outlook. Management is guiding for loan growth to taper off to the low teens this year (28% in 2011) but we do nevertheless expect margins to stabilise somewhat, thus the 6% upgrade in 2012 earnings. On expectations of slower economic growth ahead, however, we have tempered our non-interest income assumptions amid capital market volatility and factored in a marginally higher 43bps credit charge this year from 37bps in 2011. Overall, we expect a more muted 2012, with earnings flat YoY.