DBS Group Holdings

Kim Eng on 2 Feb 2013

BUY maintained. While DBS’ 4Q12 net profit of SGD760m (ex-exceptionals) lagged our and consensus expectations by 7% and 4% respectively, some of the headwinds in 4Q12 have tapered off and the outlook continues to be upbeat into 2013, barring guidance for ongoing NIM pressure. Our forecasts are broadly maintained and we raise our TP slightly to SGD17.60 (from SGD17.40) after factoring in the exceptional gain, on an unchanged FY13 P/BV of 1.3x.

Excluding a gain of SGD450m from the partial divestment of a 10.4% stake in Bank of Philippine Islands (BPI) of SGD450m, DBS reported a net profit of SGD760m for 4Q12 (+4% YoY, -11% QoQ). Management attributes the softer-than-expected results to: a) a late pick-up in China loans, b) greater-than-expected NIM compression, and c) a more subdued bond market, which contributed to reduced fee income.

Outlook remains upbeat. The pick-up in China’s economic momentum has contributed to a healthy replenishment of expired trade finance loans, while corporate loan demand remains robust – management guides for loan growth of about 10% in 2013 vs 8% in 2012 (12% on a constant currency basis). Management is also guiding for a NIM contraction of just 2-3bps for 2013 vs a hefty 11bps decline from 1.73% in 4Q11 to 1.62% in 4Q12. Costs meanwhile should be controllable, and management looks to stable to positive JAWS in 2013. Other positives include a) better asset utilisation, with its SGD LDR moving up to 69% from 64% at end-Dec 2011, b) further improvements in capital ratios, and c) an ongoing decline in NPL ratios.

Still the top pick among the Singapore banks. The restructuring of the group’s business in Hong Kong is paying off, with net profit up 25% YoY, while recurring non-interest income channels such as global transaction services, wealth management and SME-related income continue to see robust growth. Moreover, DBS is least exposed to the property market in Singapore and should be less impacted by the government’s recent cooling measures.