SINGAPORE (Nov 12): Analysts are divided on DBS Group Holdings.
On the one hand, the bank – Southeast Asia’s largest – clocked a “solid” quarter in 3Q19, soundly beating analysts’ estimates. But, on the other hand, some market watchers warn DBS could face headwinds from margin weakness and uncertainties in Hong Kong.
DBS saw its 3Q19 earnings jump 15% y-o-y to $1.63 billion, as total income for the quarter grew 13% to a new high of $3.82 billion on the back of loan growth, record fee income and higher trading gains.
The 3Q19 earnings were some 3.8% higher than the $1.57 billion consensus forecast in a Refinitiv survey of five analysts.
DBS CEO Piyush Gupta highlighted how the group’s balance sheet strength, among other factors, had put the group in “good stead to deliver healthy shareholder returns despite the prevailing macroeconomic and geopolitical headwinds.
See: DBS 3Q earnings up 15% to $1.63 bil on strong operating performance, broad-based growth
But while some analysts remain sanguine on the bank’s ability to thrive due to its diversified business mix and high dividend visibility, others are quick to stress that macroeconomic events and competitive pressures could pose risks for the group.
Diversified business mix
Following the global financial crisis in 2008, DBS has taken measures to facilitate a fundamental shift towards commercial banking, instead of relying solely on volatile universal banking. According to Maybank Kim Eng Research, this has resulted in a business mix that can “effectively navigate regional uncertainty.”
The shift appears to be paying off for the group, says analyst Thilan Wickramasinghe. He notes that the group’s fundamental drivers have been delivering the goods for the bank.
“Interest income, fees and trading all delivered despite a tough macro backdrop given the Hong Kong unrest, trade war and slowing Singapore,” says Wickramasinghe in a Monday report.
Similarly, OCBC Investment Research opines that DBS is a potential beneficiary of improved risk appetite and global liquidity inflows into Asia equities. One particular area of strength that the brokerage identifies for the bank is its emphasis on technology.
“We see its earlier focus on technological investments as a key differentiating factor in improving customer experience and acquisition,” says the research team. “The bank has moved to quarterly dividends from FY19 to provide shareholders with a more steady income stream and aims to continuously pay sustainable and increasing dividends over time (50% payout ratio).”
Net interest margins a concern for 4Q19
With an additional US Fed rate cut expected in October, DBS is likely to experience a softer outlook for its net interest margins (NIMs). This has since emerged a key concern for all three brokerages.
DBS’s NIMs dipped 1 basis point q-o-q to 1.9% in 3Q19, as underlying NIMs declined. However, this was partially offset by sustained margins from its treasury markets.
Moving forward, CGS-CIMB Research analyst Andrea Choong stresses that there is likely to be a further compression in 4Q19, on the back of an additional rate cut and the expedited timeline of the cuts.
“[This] tempers DBS’s expectations of a y-o-y NIM expansion to +3bp (from 4-5bp previously) in FY19, and -7bp in FY20,” says Choong.
Wickramasinghe remains slightly more optimistic on the situation, citing DBS’s ability to overcome the minor hurdle. “This should be partly offset by continued loan growth, especially outside Singapore,” he says.
OCBC also notes that DBS management has expected a compression of the group’s NIMs and is expecting both credit costs and loans growth figures for FY20 to be similar to FY19, adding that the management will also continue to manage costs prudently
Little danger in Hong Kong
Amid worsening protests in Hong Kong, several companies are exercising caution on their assets. While DBS is one company with Hong Kong as a key market, market watchers are quick to note that the bank is in little danger of suffering serious damage, if any at all.
Although the management has prided itself on the absence of any specific sectoral distress thus far, Wickramasinghe remains fairly cautious about the bank’s position in Hong Kong going forward.
“At 29 bps, credit charges were flat y-o-y,” says Wickramasinghe. “While provisions increased, this was mostly for general provisions to take account for increased macro uncertainty - especially in Hong Kong,” he says.
Similarly, Choong highlights how DBS maintains a positive medium-term view on Hong Kong as it leverages more into the Greater Bay area.
“The bank’s Hong Kong exposure comprises mostly of loans to large China/Hong Kong conglomerates – credit quality of this book has stayed solid,” says Choong. “Stress-testing this portfolio against a 40% drop in real estate prices revealed a manageable impact.”
“DBS stresses that most of the impact on tourism, retail, and hospitality sectors in Hong Kong affect deposit levels as these industries were not traditionally highly leveraged to begin with. Its Hong Kong dollar and US dollar deposit levels remain well-managed and expanded q-o-q in 3Q19,” adds Choong.
See: DBS widens allowances for Hong Kong operations amid political turmoil; earnings hit
As a result, both OCBC and CGS-CIMB are maintaining their “hold” calls on DBS with target prices of $27.50 and $28.29 respectively.
Maybank Kim Eng, on the other hand, has upgraded DBS to a “buy” from a previous “hold” with a target price of $29.92, on the back of attractive valuations and high dividend visibility.
As at 1.04pm, shares in DBS Group Holdings are trading one cent lower, or 0.04% down, at $26.63. This translates to a price-to-earnings (P/E) ratio of 10.5 times and a dividend yield of 5.2% for FY20E, according to Maybank valuations.
