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Solid outlook but analysts say DBS close to fairly valued

PC Lee
PC Lee5/2/2018 12:41 PM GMT+08  • 3 min read
Solid outlook but analysts say DBS close to fairly valued
SINGAPORE (May 2): DBS Group Holdings reported record earnings of $1.51 billion in 1Q18 ended March, up 21% from a year ago.
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SINGAPORE (May 2): DBS Group Holdings reported record earnings of $1.51 billion in 1Q18 ended March, up 21% from a year ago.

Non-Performing Loan (NPL) ratio came off from last quarter’s 1.7% to 1.6%. ROE improved to 13.1%, the highest in a decade, from 10.5% in 4Q17.

See: DBS posts 21% rise in 1Q earnings to $1.51 bil

Maybank KimEng says DBS’s 1Q18 results demonstrate the bank’s ability to generate earnings growth in the current business environment and expects its growth story to remain intact.

Maybank is also assuming a benign credit environment with no significant asset quality deterioration given the improvement in free cashflow for corporates.

Because of a higher interest rate outlook, Maybank has lifted net profit estimates for FY19/20 by 4%/5% and sustainable ROE by 14.7% from 14.3%.

The house has raised NIM by 2-5% for FY18-20 after factoring in a higher SIBOR forecast in FY18/19 of 1.65%/1.90%, according to its Singapore economist.

However, following the 24% year-to-date increase, Maybank says the shares are fairly valued on its revised estimates.

“As a result, our target price is slightly raised to $30.80 based on unchanged 1.6 times FY18 book value, close to 2SD above its historical mean of 1.2x to reflect higher ROEs,” says analyst Ng Li Hiang.

Following the better-than-expected 1Q18 results, OCBC Investment Research has raised its FY18 earnings from $5654 million to $5874 million, up 3.9%.

While OCBC’s fair value was already among the highest in the Street before the results, it has also fine-tuned its fair value to $34.60 from $32.53.

“DBS has stayed consistently on our top stock pick list and the stock price has done well, up 21% year-to-date. With a dividend payout of $1.20, dividend yield is 4.0%,” says OCBC analyst Carmen Lee in a Monday report.

Meanwhile, Phillip Securities says DBS’s standout performers were group Net Interest Margin (NIM), wealth management and Hong Kong.

NIM improved from 1.74% in 1Q17 to 1.83% in 1Q18, the highest in seven quarters. In fact, every 1 basis point rise in NIM translates into $8 million in net income. Guidance is for FY18 NIMs to rise by 100 bps to 1.85%.

DBS Hong Kong’s 1Q18 earnings also surged 66% to $350 million and now accounts for almost 30% of group profits.

The bank’s Wealth Management business also saw a sharp increase of 49% y-o-y to $331 million, forming 39% of total Fee Income now.

“We raised our target price to $32.70 from $29.30. Our rating has been downgraded to ‘accumulate’ due to the share price performance,” says Phillip.

Lastly, CGS CIMB Securities has an “add” with $34.00 target price but warns DBS investors to focus on possible downside risks.

Asset quality remained healthy, with NPA formation at a four-year low of $195 million versus usual run-rate of $300 million. NPL ratio also dipped to 1.6% from 1.7% in 4Q17.

CGS CIMB has raised its FY18-20 EPS by 2.6-3.4% on higher NIM, lower credit costs and expenses.

“Accordingly, we raise our GGM-target price to $34, implying 1.8 times FY18 P/BV, as we input a higher sustainable ROE of 14% from 13.5%,” says Yeo.

As at 12.16pm, shares in DBS are down 27 cents at $30.57 or 13.3 times OCBC's FY18 forceast earnings.

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