DBS

Kim Eng on 24 Apr 2012

SELL ahead of weak 1Q12 results. DBS will be announcing its 1Q12 results on the morning of 27 April. We expect no major surprises, unless net interest margins (NIM)/treasury income prove to be more robust than expected. Our Sell call is maintained as is our SGD11.50 TP (2012 ROE: 10.3%).

Expect YoY dip in net profit. Our 1Q12 net profit estimate of SGD776m implies a 4% YoY dip in earnings (+6% QoQ). The YoY dip is largely premised on:

Lower trading income, which was exceptionally buoyant in 1Q11, supported by stronger income from customer flows respectively. Trading income in 1Q11 alone made up 39% of the full-year's income.

Lower YoY margins. NIM in 1Q11 was 1.80% versus 1.73% in 4Q11. We expect NIMs to have bottomed but do not expect a significant recovery at this stage.

The QoQ improvement in earnings is expected to largely emanate from seasonally lower overheads. Earnings could surprise on the upside if:

NIM recovers at a faster pace. Our forecasts assume an average NIM of 1.74% for the year which implies a stable outlook for now. Better-than-expected NIM recovery, particularly in Hong Kong, could provide the impetus for improved prospects.

Credit costs come in lower than expected. 4Q11 saw a blip up in NPLs but this has been attributed to a specific shipping loan. We do nevertheless expect a pick-up in credit charge this year to about 43 bps from 39 bps in 2011 and lower rates here would be positive to earnings.

Loan growth still buoyant. Latest industry stats point to moderating but still buoyant momentum. DBS has guided for loan growth in the low teens in 2012 as it scales back on its USD trade financing lines, but we would expect momentum to only trail off towards 2H. Our forecast builds in an 11.5% growth expectation this year.

2% net profit growth for 2012. Our 2012 net profit forecast of SGD3.08b is broadly in line with consensus expectations and this translates to relatively flat earnings for the year. One of the key growth drivers for DBS in 2011 was the ramp-up in asset utilisation, with its loan/deposit ratio rising to 89% from 81% end-2010 – further improvements here are likely capped. Nevertheless, with more stable margins, we do expect net interest income to expand by about 14% YoY this year. Moreover, we expect overheads to expand at
a slower pace. The dampener to our growth expectations as such emanates from lower non-interest income amid capital market volatility and higher credit charge rates.

Still wary of earnings risks. Our SELL call continues to be premised on the greater susceptibility of DBS’s earnings to exogenous factors, which thus warrants a discount to peers in this environment. Separately, we expect the potential acquisition of Bank Danamon and Alliance Financial Group to be slightly dilutive to 2013 earnings (-5%) and ROE (from 10.5% to 9.9%).