EUR 850.00 For Business Accounts Only

Morningstar | Back on Track: DBS' 1Q Result Solid as Wealth Management and Trading Income Recover

As expected, narrow-moat DBS Group’s first-quarter result was solid, bouncing back from a generally weak fourth quarter for most banks in the region. Net profit of SGD 1.65 billion was 9% higher than the same period last year and materially higher than SGD 1.32 billion in the fourth quarter. The weak fourth-quarter result was due to soft capital market conditions, resulting in lower wealth-management and brokerage revenue. A recovery in capital markets in the first quarter saw improved investor sentiment with wealth-management revenue rising to SGD 315 million from SGD 218 million last quarter. Net trading income was also higher at SGD 443 million, up from SGD 229 million last quarter.

With economic conditions remaining resilient, another positive was the low level of new nonperforming loans and credit costs in the first quarter. Expected credit loss for Stage 1 and 2, or general allowance, also benefited from a SGD 100 million write-back. This was attributable to better credit conditions and changes to assumptions applied in the credit model. Our forecast is adjusted to account for the lower credit cost in fiscal 2019, but we maintain our more conservative medium-term forecast, as we anticipate normalisation of credit cost as global growth moderates.

Our fair value estimate of SGD 27 is unchanged and we believe the bank is fairly valued. Mid-single-digit loan growth and net interest margin guidance was maintained. Around 5-6 basis points in net interest margin improvement is expected, attributable to the repricing of the fixed-rate book. The latter makes up close to 60% of DBS' book and the repricing will progressively flow through over the next few quarters. Net interest margin for the bank's Hong Kong book was largely steady against last quarter at 2.05% and higher than 1.87% the same period last year, also on higher interbank rates. We have factored in a slight increase in net interest margin in fiscal 2019.

The generally positive economic conditions are expected to support mid-single-digit loan growth. Demand from corporates remain robust with overall loan growth rising 1% on last quarter on constant-currency terms. This should offset softer trade loans and mortgages in Singapore. Transactions for the residential market in Singapore remain soft after the implementation of restrictive measures by the regulator in the middle of last year. Year-to-date mortgages at the system level were 1.3% lower. Management noted both new loans and refinancing are tracking below expectation. Positively, the trade situation between the United States and China is seeing some stabilisation. There is a limited large-scale shift in supply chains for DBS' clients, and management expects any new investments away from China to be confined to countries in the Asia region, where the bank already has a presence and can facilitate cross-border transactions. There is no change to our 6% loan growth forecast for fiscal 2019.

The bank adjusted its dividend payment to quarterly from semiannually. Its overall dividend policy is unchanged and aims to increase dividend with net profit growth. The first-quarter dividend of SGD 0.30 is in line with the full-year dividend of SGD 1.20 from last year. The board considers the quarterly payment as a benefit to shareholders, allowing investors to receive the dividend sooner. Management also noted that the quarterly payment smooths the calculation of its capital adequacy ratios. This is reflected in the reported first-quarter common equity tier 1 ratio of 14.1%, which excludes the second-half fiscal 2018 dividend going ex-dividend on May 2. Net of the second-half dividend, CET1 tracks within earlier guidance of 12.5%-13.5%.