DBS

DMG & Partners Research on 1 Nov 2012

DBS reported Q3 2012 net profit of $856 million, up 12 per cent y-o-y, and up 6 per cent q-o-q. This is slightly above consensus and our expectations of $801 million and $800 million, respectively.

While profit before allowances was up a marginal 3 per cent q-o-q, a 47 per cent or $49 million q-o-q plunge in allowances led to the above-expectations net profit. As such, we do not believe the market will respond positively to the slightly stronger earnings.

We will review our earnings forecast and target price after the analysts' briefing. We do not see any catalyst that will drive DBS share price higher after the 21 per cent year-to-date share price rise. Our "neutral" recommendation is maintained.

Net interest income was up 1 per cent q-o-q, despite net interest margin declining 5 basis points q-o-q to 1.67 per cent, and loans contracting 1 per cent or $2.7 billion q-o-q.

The sequential loan weakness is largely due to the general commerce segment, which recorded a 4.2 per cent or $1.6 billion sequential fall - recall that DBS recorded very strong trade finance loans in H2 2011, and this recent result suggests that some reversals are taking place.

In currency terms, Sing-dollar loans expanded 4 per cent q-o-q.

Underlying US-dollar loans contracted 2 per cent q-o-q, although it was a worse 5 per cent decline in US-dollar terms.

We believe the loan weakness will adversely affect investors' interest in DBS.

Fee and commission income was up 12 per cent q-o-q (up 4 per cent y-o-y), largely driven by investment banking and loan-related activities. Net trading income of $137 million was relatively flat both on q-o-q and y-o-y bases.

The cost-income ratio of 45 per cent is close to Q2 2012's 44.8 per cent.

Expenses rose 3 per cent sequentially due to higher staff and other general expenses, and were partially offset by a fall in revenue-related costs.

NEUTRAL