Tuesday, May 12, 2009

DBS - Neutral by DMG (11 May 09)

DBS reported 1Q09 net profit of S$433m, down 28% YoY. This is stronger than our S$345m forecast primarily due to a S$116m YoY improvement in other noninterest income, which was attributed to gains from trading activities. Lacklustre net interest income. Net interest income grew a marginal 2% YoY to S$1,076m. Whilst average interest bearing assets was up 7.7% YoY to S$219b, NIM narrowed 5 bps YoY to 1.99%, due to the fall in Singapore interbank rates.

Jump in trading income. Other non-interest income recorded a 76% YoY jump to S$269m, primarily due to net trading income reversing from a 1Q08 loss of S$161m to a gain of S$204m. This was due to interest rate and foreign exchange rate activities supported by strong customer flows. This income segment is volatile and we have assumed sharply lower gains in the remaining
three quarters of 2009.

Allowances rose two-fold to S$437m. We are concerned that DBS’ relatively strong loan growth from 2004 till 2008 (15.9% CAGR, versus other peers of 10.7%) will mean more provisions going ahead. We raised our 2009 provisioning assumption by 3% to S$1.6b, which equates to 126 bps of loans. This is 80% higher than 2008’s S$888m provisioning. Our Dec 09 NPL forecast of 4.2% is sharply higher than Mar 09’s 2.0%.

We raise our target price to S$11.50, (from S$8.50 previously) pegged to 1.1x 2009 book, given the general market expectation that the worst of the US economic growth is behind us. We note that DBS traded at a 6-year average P/B of 1.4x, and its current 1.2x P/B leaves minimal room for share price upside. DBS FY09F dividend yield of 3.5% is also relatively unexciting (after taking into consideration interim dividend of 14S¢/share). Within the banking sector, UOB is our preference, on the back of its higher-quality asset.

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