DBS Group Holdings

OCBC on 6 Aug 2012

Summary: DBS Group Holdings Ltd posted 2Q12 net earnings of S$810m or 1H net earnings of S$1743m. This was in line with consensus expectation. Net Interest Margin (NIM) fell from 1.80% in 2Q11 and 1.77% in 1Q12 to 1.72% in 2Q12. It declared an unchanged interim dividend of 28 cents. Margin pressure is likely to remain for the rest of the year, but management expects to mitigate this by undertaking a few measures like increasing cross-sell, raising productivity, bringing down its cost-to-income ratio, focusing on further growing several of its key businesses (including SME and Wealth), managing its funding, etc. We have raised our FY12 earnings estimates from S$3138m to S$3252m. Based on the same unchanged 1.3x book, we increased our fair value estimate from S$15.40 to S$15.94. Retain BUY.

2Q12 earnings were in line with market expectations
DBS Group Holdings Ltd posted 2Q12 net earnings of S$810m, slightly above market expectations of S$807m from a Bloomberg poll. This is up 10% YoY, but down 13% QoQ. Overall, 1H12 earnings amounted to S$1743m, up 13%. Net Interest Income rose 10% YoY but was down 1% QoQ to S$1324m in 2Q12. Non-interest Income fell 3% YoY and 24% QoQ to S$621m. The QoQ decline was largely due to strong trading gains in 1Q12. Net Interest Margin (NIM) fell from 1.80% in 2Q11 and 1.77% in 1Q12 to 1.72% in 2Q12. It declared an unchanged interim dividend of 28 cents. The stock will be quoted ex-dividend on 15 Aug 2012.

Market conditions remain challenging, but management is cautiously optimistic
While headwinds remain, especially from the US, Europe and China, management is cautiously optimistic about prospects for the rest of the year. They are not overly concerned about liquidity in the market and believe that DBS is still able to borrow cheaply from the market. However, margin compression has taken place, and there was margin pressure in China which led to a 2-bp impact on the group in 2Q12. Going forward, with the slowdown in the other key economies as well as in Asia, this is likely to impact overall loan growth and management is now expecting growth of about 10% (down from 13%) partly due to trade finance business slowdown and a general softening in manufacturing activities.

Retain BUY and raised fair value estimates to S$15.94
We expect market conditions to remain challenging, but management is putting in place its strategy to continue to increase cross-sell, raise productivity, bring down its cost-to-income ratio, focus on further growing several of its key businesses (including SME and Wealth), manage its funding, etc. These measures should help to ensure a healthy 2H. We have adjusted our estimates and raised FY12 earnings from S$3138m to S$3252m. Based on the same unchanged 1.3x book, we increased our fair value estimate from S$15.40 to S$15.94. Retain BUY.