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DBS Group Holdings Ltd 1Q18 Results Summary

Core Content

DBS Group Holdings Ltd released its first-quarter 2018 results, showcasing strong performance across multiple segments. The report highlights key financial metrics, growth drivers, and investment outlook.

Main Points

Financial Highlights

• Net Interest Income (NII): Increased by 16.2% YoY to SGD 2,128 million, with NIM rising to 1.83%, the highest in seven quarters.
• Net Fees & Commission Income: Rose by 11.9% YoY to SGD 744 million, driven by a 46% increase in wealth management fees.
• Other Non-Interest Income: Grew by 25.1% YoY to SGD 488 million, with net trading income rebounding to SGD 368 million.
• Total Income: Increased by 16.4% YoY to SGD 3,360 million.
• Adjusted Net Profit: Rose by 25.7% YoY to SGD 1,521 million, including a SGD 86 million disposal gain.
• ROE: Reached 12.5% excluding the disposal gain, reflecting strong earnings performance.
• Cost-to-Income Ratio (CIR): Improved to 41.6%, better than the guidance of 43%.

Regional Performance

• Hong Kong: Earnings surged by 66% YoY to SGD 350 million, contributing almost 30% of group profits.
• Singapore: Provisions were lower than expected, with a slight decrease in provisions compared to 1Q17.
• Global Revenue: Hong Kong and Greater China accounted for nearly 30% of total revenue.

Asset Quality

• New NPA Formation: Reached SGD 195 million, the lowest in four years.
• Credit Cost: Reduced to 20 bps, below the previous guidance of 25-30 bps.
• Loan Growth: Total loans grew by 9.9% YoY, with notable growth in manufacturing, construction, and financial institutions (FIs) sectors.

Key Information

Investment Outlook

• Target Price: Raised to SGD 32.70 from SGD 29.30.
• Rating: Downgraded to Accumulate due to share price performance.
• Growth Drivers:
  • Margin expansion from rising interest rates.
  • Volume growth with an improving economy.
  • Strong performance in wealth management and Hong Kong.
  • Expected provision reversal of around SGD 1 billion.

Valuation

• Method: Gordon Growth Model with ERP of 5.5% and g of 3%.
• Valuation Metrics:
  • P/E Ratio: 13.5x (FY18e).
  • P/B Ratio: 1.7x (FY18e).
  • ROE: Expected to remain at 12.5% for FY18e.
  • Terminal Growth Rate: Assumed at 3% for valuation purposes.

Risk Factors

• Investment Income: Missed expectations, falling to SGD 22 million from SGD 100 million due to weak bond market performance and reclassification of debt securities.
• Interest Rate Impact: Rising interest rates may create stress on SME and consumer loans, though DBS uses a 3.5% rate assumption for mortgage assessments.
• Provision Reversals: Expected in the future, potentially boosting profitability.

Summary

DBS Group Holdings Ltd's 1Q18 results reflect a strong performance with NII and wealth management leading the growth. The group's NIM reached a two-year high, and Hong Kong contributed significantly to profits. Despite a decline in investment income, net trading income helped offset the loss. Asset quality remained benign, with a low credit cost. The report highlights growth in several business segments and expects continued improvement in the coming quarters, although there are concerns about the impact of rising interest rates on certain loan portfolios. The investment rating was downgraded to Accumulate, with an updated target price of SGD 32.70.