SINGAPORE (May 4): Analysts are keeping a rather neutral stance on DBS Group following the group’s 29% y-o-y drop in 1Q earnings and uncertainties from the Covid-19 outbreak.

Despite the bank’s drop in earnings, it is keeping its dividend for the quarter at 33 cents per share.

DBS CEO Piyush Gupta said that while the bank’s expenses will be tightened, there will be no retrenchments or pay cuts, although discretionary non-staff costs will be reduced. Investments will be prioritised, and bonuses will be aligned to earnings, said Gupta in his commentary in the bank’s earnings announcement.

See: DBS increases provision but keeps 1Q dividend at 33 cents

RHB Group Research has kept its “neutral” rating on DBS but with a lowered target price of $18.70 from $21.50 previously.

In an Apr 30 report, analyst Leng Seng Choon says, “Uncertainties make it unlikely for DBS to revert to its five-year historical average price-to-net book value of 1.19 times in the near term.”

The research house expects future earnings to remain weak. For FY20, the group’s management has guided for profit before allowances to be about FY19’s level. Hence, FY20-21 earnings estimates have been cut by 14% each, mainly due to increased provisioning expectations.

DBS also guided for credit costs to rise between $3 billion and $5 billion (80- 130bps) cumulatively over two years. Small & medium enterprise loans are higher risk in the current circumstances, and accounts for 10% of DBS’ loans composition.

However, these are predominantly secured against property. RHB has forecasted overall FY20-21 provisions of $2.38 billion and $1.78 billion, which works out to a cumulative 114 basis points for this timeframe.

Meanwhile, CGS-CIMB shares similar sentiments as it continues to recommend “hold” on DBS with an unchanged target price of $18.80.

DBS cites the recession in FY02-03 and the GFC over FY08-09 as reasonable case models to gauge the impact of Covid-19.

In a Thursday report, analyst Andrea Choong says, “We reiterate that the key difference between then and now are the swift and conjoined relief efforts by regional central banks to provide cash flow assistance, although at the expense of credit risks materialising once the aid wears off.”

Meanwhile, two-thirds of 1Q20’s 99bp credit costs ($1.09 billion) were pre-emptive macro overlays for Covid-19. Over half of the 35bp SPs ($383 million) were due to loans to an oil and gas (O&G) trader classified as non-performing loan (NPL) in 1Q20. More charges are likely as investigations are still ongoing.

See: DBS, OCBC, UOB likely to record impairments owing to Hin Leong Trading bankruptcy: Phillip Securities

DBS indicated that $46 billion worth of corporate loans (12% of loans) will be directly impacted by the pandemic-driven slowdown; 20% of these are under close monitoring. O&G exposures rose to $23 billion (6% of loans) from $17 billion in 3Q17 as DBS remains supportive of oil majors, state-owned enterprises, and those with solid operating metrics, although it expects further impairments from its $1 billion portfolio of performing offshore support vessels.

All in, it cautions about 80-130bp in cumulative credit costs over FY20-21 as Covid-19 relief measures wear off.

“We keep our FY20/21F credit costs estimates at 60bp/50bp. Total quarterly impairments should moderate given the front-loading of GPs in 1Q20. Incremental SPs q-o-q are a likely scenario, alongside which GPs should decline,” says Choong.

On the other hand, Maybank Kim Eng has a more bullish stance on DBS as it is keeping its “buy” call with a lower target price of $21.99 from $22.10 previously.

In a Thursday report, analyst Thilan Wickramasinghe believes that the bank remains operationally resilient.

Net loans expanded 6% y-o-y driven by non-trade corporate lending. The group’s management claims a resilient pipeline especially in real estate; the technology, media and telecom (TMT) sector; and restructuring loans.

Additionally, DBS’ North Asia operations (Taiwan, China, HK) are rebounding following lockdowns in 1Q20.

“We believe the group’s liquid balance sheet, especially for USD (78% LD ratio) provides opportunities for market share gains. Management claims improved pricing power, even for large corporate customers while government risk sharing schemes should also provide higher return opportunities,” says Wickramasinghe.

Meanwhile, allowances increased 14 times y-o-y, with 65% of this representing general provisions and is one-third driven by cautionary management overlay. SMEs, Aviation and Oil & Gas exposures need to be closely watched, although high levels of collaterals, existing provisions and government support programs should provide some relief.

“Nevertheless, we expect credit charges to remain elevated up to 2023 and NPLs to rise to nearly 3% (compared to 1.6% now) as the pandemic works its way through,” says Wickramasinghe.

As at 12.00pm, shares in DBS Group are trading at $19.72 or 1.0 times FY20 book with a dividend yield of 6.6%, according to CGS-CIMB’s estimataes.