DBS Group - Cost discipline amid weak topline growth
- DBS is our preferred pick among the Singapore banks for its diversified non-NII growth, ability to control costs, and least demanding valuations.
- Amid protracted slowdown in the economy, DBS’s smallest exposure to SMEs and investment property mortgages could lend further stability to asset quality.
- Maintain Hold and GGM-based target price of S$15.40 (0.86x CY17F P/BV).
NIM could see some downside before upside
- DBS has guided for NIM to fall a further 4-5bp in 4Q16. We see near-term NIM pressure from repricing of loans to the lower SIBOR/SOR, higher cost of US$ funding, and competition to deploy excess liquidity in the S$ space.
- Beyond the next two quarters, NIM pressure could ease as the US Fed hikes are likely to have a positive impact on SIBOR/SOR and improve US$ loan spreads.
Diversified non-NII growth
- DBS has managed to see diversified fee growth across its franchise, with a good showing in IB fees, credit cards, and wealth management with the help of its Manulife bancassurance deal. Trading and other income has also consistently done well in recent quarters on the back of market volatility.
Asset quality unlikely to deteriorate significantly
- DBS guided that the worst of the oil & gas credit cycle is over as most chunky vulnerable exposures have been classified, though it is still in talks with some names to refinance their loans. It expects NPL ratio to be within 1.4% in 4Q16 (3Q16: 1.3%).
- In a period of prolonged sluggish economic growth, SMEs tend to be the most vulnerable, especially if they are unable to get access to credit. Higher unemployment could also put pressure on mortgage asset quality as borrowers are unable to meet their monthly payments. Among the three banks, DBS has the smallest exposure to SMEs, while its mortgage exposure is skewed towards owner-occupied and HDB properties which tend to have more resilient asset quality.
Early investments in digitisation led to impressive cost savings…
- DBS surprised positively with a 40.9% cost-income ratio in 3Q16, down from 44.0% in the prior quarter which included one-off discretionary and marketing expenses.
- DBS aims to cut its cost-income ratio by 1% pt per year, as cost savings from its early investments in technology could result in efficiency gains, while it is also consciously keeping a tight lid on expenses in a slow revenue growth environment.
…and could also allow it to grow market share overseas
- DBS is the only bank to roll out a fully digital banking strategy with the launch of Digibank in India this year. We think this will help DBS’s position as a small foreign bank competing with a limited branch network overseas.
- Its acquisition of ANZ will also expand its customer reach by 6x in Indonesia and 2.5x in Taiwan, and should help boost profitability as DBS gains market share by employing a digital banking strategy in those two countries.
Top pick for exposure to the Singapore banks
- We maintain our Hold call, with a GGM-based target price of S$15.40 (0.86x CY17F P/BV).
- DBS remains our preferred pick among the Singapore banks for its diversified fee growth, cost savings from its earlier investments in technology, smallest exposure to the segments that could see asset quality weakness in a period of slow economic growth, and least demanding valuations among peers.