SINGAPORE (Aug 4): RHB is maintaining its “neutral” rating on DBS Group with a slight increase in target price to $20.65 given guidance for higher NPLs from the oil & gas space.

In a Friday report, analyst Leng Seng Choon forecasts DBS’ NPL ratio to rise to 1.6% by end 2017 from 1.5% in 2Q17. DBS’ management has guided that asset quality stress from the oil & gas sector remains and also sees more NPLs coming from smaller non-state-owned players.

In 2Q17, DBS’ credit cost of 40bps was higher than 1Q17’s 26bps. Provisioning was mainly due to deterioration in collateral values of oil & gas assets. 2Q17’s loan loss coverage of 100% also fell from 1Q17’s 103%.

In line with guidance for higher future NPLs, management expects 2017 specific provisions to be higher than previously guided. DBS expects 2017 provision to hit $1.54 billion after reaching $0.85 billion in 1H17.

Management has also guided for 2017 NIM to be 1.75-1.76%. 2Q17’s NIM of 1.74% was flat q-o-q. “We believe SIBOR/SOR strength in recent weeks could help widen its 2017 NIM to 1.76% vs 1H17’s 1.74%,” says Leng.

Loan in 2Q17 was 1.5% higher q-o-q, driven by the manufacturing and building & construction segments. DBS has increased its Singapore’s mortgage loan share to 28.7% from 27.9% in June 2016. Leng is projecting loan growth of 4% in 2017.

To recap, DBS reported net profit of $1.13 billion in 2Q17. Excluding one-time items, 2Q17 net profit of $1.14 billion was down 6% q-o-q. 1H17 net profit of $2.4 million represented 53% and 50% of RHB and consensus pre-results 2017 net profit forecasts respectively.

See: DBS 2Q earnings rise 8% to $1.14 bil; achieves record earnings of $2.35 bil for half year

Update: Shares in DBS Group closed 59 cents lower at $21.49 on Friday.