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It's time to 'buy' DBS despite the plunge in its FY2020 net profit, analysts say

Amala Balakrishner
Amala Balakrishner2/11/2021 03:05 PM GMT+08  • 5 min read
It's time to 'buy' DBS despite the plunge in its FY2020 net profit, analysts say
CGS-CIMB has a target price of $28.35 while RHB’s analysts have a $30 call. MKE’s analysts’ target is $29.14.
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DBS Group Holdings remains a counter on analysts’ watch lists despite the 26% y-o-y plunge in its net profit for FY2020 to $4.72 billion.

This decline was due to a 27-basis point dip in its net interest margin (NIM) to 1.62% as well as a four-fold surge in its allowances to $3.07 billion.

See: DBS reports 26% lower FY20 earnings of $4.72 bil, declares 4Q dividend of 18 cents

Analysts from RHB Securities’ Singapore Research team say that the group’s performance is line with both their and consensus expectations.

Interestingly, they observe some recovery in the group’s business momentum in 4Q2020 ended December.

“A recovery in business momentum and stronger regional economic data are lifting expectations for healthy loan demand, robust fee income growth and possibly, normalisation of credit costs,” the analysts highlight in a Feb 11 note.

They add that the better prospects will sustain DBS’ share price re-rating and result in multiple expansion.

Agreeing, analysts from OCBC Investment Research point out resilient fee income and broad based loan growth across DBS’ non-trade corporate, housing and wealth management segments as bright spots based on its performance in the last quarter of FY2020.

In its 4Q2020, the group had reported a net profit of $1.02 billion, down 22% q-o-q and 33% y-o-y.

Of this, total income, which came in at $3.26 billion, was down 9% y-o-y on the back of continued loans repricing amid a bleak environment, seasonally lower fee income and lower gains from investment securities.

Fee income had fallen by 6% q-o-q but rose by 1% y-o-y. The q-o-q dip follows softer wealth fees of $345 million, but was offset by slightly better credit card fees.

DBS’ performance in 4Q2020 surpassed the expectations of CGS-CIMB Securities, by 4% thanks to lower taxes and credit costs.

Analysts Andrea Choong and Liew Siew Khee were expecting DBS’ net profit to come in at $969 million.

The duo are optimistic of the group logging stronger growth due to improvements in its asset quality. This is due to the lower loans under moratorium in Singapore and Hong Kong they explain in their Feb 10 flash note.

Maybank Kim Eng’s (MKE) analysts share similar sentiments, due to the 12% increase in the group’s non-performing loans (NPLs) in 2020.

This is “a good reading taking the Covid-19 disruption and recession into context,” the point out in a Feb 10 note.

Drawing reference to the NPLs during the 2016 Offshore & Marine crisis, the analysts say that NPLs had risen by 69% y-o-y.

“Of course, asset quality is not out of the woods yet as regional moratoriums are ongoing. Risks exists in 1HFY2021 as these expire,” MKE’s analysts caution.

For comparison, moratoriums had fallen to 1.2% of loans in 4Q2020 compared to 4% in 3Q2020 as customers mostly began repayments rather than opting for further relief.

Credit outlook

Meanwhile, CGS-CIMB’s Choong and Lim point out that DBS’ credit costs of 61 basis points in 4Q2020, is slightly lower than the 65 basis points they had expected.

The 61 basis points comprises: 34 basis points in loan spread prices (SPs), 23 basis points in gross prices and 4 basis points in the SPs for other exposures.

By contrast, the group’s credit costs had come in at 58 basis points in 3Q2020 ended September.

Even so, Choong and Lim are not fazed. “We see muted share price impact as earnings were largely within market expectations and a low quality beat vs our forecast,” they elaborate.

Agreeing, OCBC’s analysts say that credit outlook looks encouraging with significant declines in loans under moratorium from peak levels across segments of Singapore housing and SME loans (reduced to 10% and 25% respectively), and Hong Kong large corporate and SME (down to 50%).

“Total allowances over a two -year period are expected to come in at the middle of its $3 billion to $5 billion range, with more visibility expected towards middle of this year with progression of extended moratoriums,” they add.

Ready, steady, growth?

Looking ahead, the analysts are already anticipating brighter days for the group due to the optimistic tone adopted by DBS’ management in its FY2021 outlook.

“This stemmed from a visible rebound in business momentum across all operating markets into Jan 21, encouraging recovery of non-II towards pre-Covid-19 levels, and contained asset quality metrics,” mulls CGS-CIMB’s Choong.

Also optimistic is OCBC’s analysts who believe that the group, has already started the year on a strong note with a higher income from a year ago. This was enabled by treasury markers and fee income growth as well as strong loan and deposit growth momentum.

They expect NIMs to rage between 1.45% and 1.5% going forward, with some pressure expected even though the “bulk of the pain from last year’s rate cuts [has] already been taken”.

Aside from this, RHB’s analysts predict that the group’s Lakshmi Vilas Bank (LVB) in India will turn profitable in the next 12 to 24 months as DBS overlays its digital capabilities with LVB’s customer base and network to accelerate its India strategy.

This, they add, will enable DBS to tap on LVB’s 2 million retail customers for cross-selling of personal loans. It will also scale up lending to LVB’S 125,000 SME customers, they add.

To this end, all the analysts have posted “buy” or “add” calls on DBS.

CGS-CIMB’s Choong and Lim have a target price of $28.35 while RHB’s analysts have a $30 call. MKE’s analysts’ target is $29.14.

Shares in DBS closed up 7 cents or 0.27% at $26.70 on Feb 11.

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