DBS (DBS SP) Buy (Maintained) Down, But Still Solid. Financial - Banks Target Price: SGD18.70 Market Cap: USD33,098m Price: SGD17.

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1 Results Review, DBS (DBS SP) Buy (Maintained) Financial - Banks Target Price: SGD18.70 Market Cap: USD33,098m Price: SGD17.20 Down, But Still Solid Macro Risks Growth Value Vol m DBS (DBS SP) Price Close Relative to Straits Times Index (RHS) Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun Source: Bloomberg Avg Turnover (SGD/USD) 79.6m/63.2m Cons. Upside (%) 11.0 Upside (%) wk Price low/high (SGD) Free float (%) 70 Shareholders (%) Temasek 17.8 Shariah compliant DBS 2QFY13 results met our and consensus expectations. Loan growth remains healthy, net interest margin (NIM) held up well, noninterest income contribution remained at elevated levels and Management is comfortable with asset quality. With uncertainties vis-àvis the Danamon acquisition behind it, the Indonesia focus now is to ramp up organic growth. Maintain BUY call with FV of SGD No surprises. DBS reported 2QFY13 net profit of SGD887m (+10% y-oy; -7% q-o-q), which took 1HFY13 net profit to SGD1.8bn (+5% y-o-y). While 1HFY13 s annualised earnings were 5% ahead of our and consensus FY13 estimates, we consider the results to be within expectations, as 2HFY13 net profit is expected to be softer. DBS declared an interim tax-exempt DPS of SGD0.28, similar to 2QFY12. Result highlights. The q-o-q net profit drop was mainly due to weaker non-interest income (-6% q-o-q); not too surprising given the tougher market conditions and the absence of chunky deal-related fees in 1QFY13. On a more positive note, loan growth was healthy (+5% q-o-q, led by trade loans and SGD corporate loans), NIM was broadly stable q- o-q at 1.62% and SP charge-off was stable q-o-q at 22bps. The impact from the rise in bond yields was muted with respect to the income statement, but larger on the AFS book. AFS reserves fell to SGD96m at end-2qfy13 (1QFY13: SGD623m), although management said this had risen by about SGD60m post the quarter-end. Danamon update. Management explained that the long-stop date for Danamon was allowed to lapse, as it could not obtain approval for the proposal as originally submitted. DBS was reluctant to continue with the deal in the absence of control, citing difficulties in driving synergies as well as the acquisition being capital punitive. Nevertheless, it highlighted that its Indonesian core strategy was to grow organically. While the Danamon acquisition would have helped accelerate the process, it would continue with its organic growth strategy. Forecasts. Our earnings forecasts are relatively unchanged. Investment case. No change to our FV of SGD18.70 (target P/BV multiple of 1.3x) and our BUY call. We continue to like DBS for: i) stronger earnings growth relative to peers, ii) cheaper valuations vs peers, and iii) strong loan and capital market pipelines. Singapore Research, research@sg.oskgroup.com Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Net interest income (SGDm) 4,318 4,825 5,285 5,637 5,993 Reported net profit (SGDm) 1,632 3,035 3,809 3,594 3,827 Net profit growth (%) (20.0) (5.7) 6.5 Recurrent net profit (SGDm) 1,632 3,035 3,809 3,594 3,827 Consensus EPS (SGD) EPS (SGD) DPS (SGD) Dividend Yield (%) Return on average equity (%) Return on average assets (%) P/E (x) P/B (x) See important disclosures at the end of this report Powered by Enhanced Datasystems EFA TM Platform 1

2 2QFY13 Results Review DBS reported 2QFY13 net profit of SGD887m (+10% y-o-y; -7% q-o-q), which brought 1HFY13 net profit to SGD1.8bn (+5% y-o-y). While 1HFY13 net profit was 5% ahead of our and consensus full-year estimates, when annualised, we consider the results to be within expectations, as earnings in 2HFY13 are expected to be softer, part of which would be a reflection of seasonality. 2QFY13 net interest income (+4% y-o-y and q-o-q) was well supported by strong loan growth, up 14% y-o-y and 5% q-o-q. NIM was broadly stable q-o-q at 1.62% (- 2bps q-o-q), but down 10bps y-o-y. Asset yield remains under pressure (-17bps y-oy; -5bps q-o-q), mainly due to the continued healthy growth in short-term, loweryielding trade finance. This was cushioned by lower average funding cost (-8bps y-oy; -4bps q-o-q), as DBS continued to tap the wholesale funding market given the lower cost there. Moving forward, management thinks that it is still too early to lengthen the duration of the securities portfolio, as there is still room for yields to rise. However, DBS has started to lengthen the duration of its loan book, which is currently at 2.5 months from zero duration previously. That said, this lengthening of the loan book s duration is not expected to lead to any meaningful improvement in margins in the near-term. Management has also said that, despite the steepening of the yield curve, DBS has not seen wholesale funding rates move up, as the funding the bank has been tapping into is of shorter tenure. Overall, management maintained its NIM guidance of 1.6%, which suggests that further downside will not be too significant from the current level. Non-interest income was, not surprisingly, down 6% q-o-q. This was a reflection of the tougher market conditions during the quarter, which led to lower fee income (-6% q-o-q) and trading gains (-18% q-o-q). 1QFY13 non-interest income also benefited from deal-related fees. On a more positive note, income from treasury customer flows was broadly stable q-o-q. Y-o-y, however, 2QFY13 non-interest income surged 86% on broad-based growth with fee income up 26% y-o-y, while investment and trading income jumped 66% y-o-y on higher trading gains and higher customer flows for treasury products (+16% y-o-y). With that, non-interest income contribution was sustained above the 40% mark for the third consecutive quarter (2QFY13: 40.1% vs. 1QFY13: 42.7%), and up significantly from 31.9% in 2QFY12, while 2QFY13 operating income growth largely mirrored the growth in non-interest income, ie up 19% y-o-y but flat q-o-q. Overheads rose 13% y-o-y and 4% q-o-q, mainly due to higher staff costs. Despite the double-digit y-o-y rise in overheads, DBS still enjoyed positive jaws, as operating income growth outpaced growth in expenses, leading to CIR improving y-o-y to 42.7% (2QFY12: 44.8%). Q-o-q, CIR was higher vis-à-vis 1QFY13 s CIR of 41.1%, but this was expected as management had previously guided for CIR to rise in the coming quarters due to softer operating income levels. With the y-o-y positive jaws, 2QFY13 pre-operating profit growth rose 23% y-o-y but was down 3% q-o-q. 2QFY13 loan allowances rose 10% q-o-q, although this was mainly due to lower settlements during the quarter. Additional specific allowances for non-performing loans (NPLs) were actually 9% lower q-o-q, while the net charge-off rate was stable q-o-q at 22bps of loans. Y-o-Y, loan allowances jumped 136% y-o-y, but this was mainly a reflection of: i) the exceptionally low charge-off rates in previous years (2QFY12: 8bps), and ii) higher collective allowances required for the healthy loan growth. With higher loan allowances, y-o-y net profit growth stood at a more muted 10% while q-o-q, net profit fell 7%. ROE remained respectable at 10.9% (2QFY12: 10.9%), but off the 12% registered in 1QFY13. 2QFY13 gross loan growth remained healthy at +5% q-o-q (+14% y-o-y), with part of the increase coming from Singapore corporate and regional trade loans. Annualised gross loan growth was 23%, ahead of our 12% assumption. DBS guided for a fullyear loan growth of 14%, up slightly from the 12% guidance in the previous quarter. Nevertheless, we have kept our assumption unchanged. Meanwhile, total customer deposits broadly kept pace with loan growth, up 4% q-o-q (+13% y-o-y), led by SGD and USD deposits. Thus, group loan-to-deposit ratio (LDR) was broadly stable at 89.8% (1QFY13: 89.3%; 2QFY12: 89.8%). Current account, saving account (CASA) growth was slower at 2% q-o-q (+13% y-o-y), resulting in group CASA ratio declining to 59.4% from 60.9% at end-march (end-2qfy12: 59.9%). DBS remains comfortable with its funding mix of customer deposits and wholesale funding. Also, despite system LDR having reached a high of 99% as at end-june, the bank has not noted any significant pressures on deposit cost. See important disclosures at the end of this report 2

3 Absolute gross non-performing asset (NPA) rose 7% q-o-q (flat y-o-y), although this was mainly due to lower write-offs during the quarter. The gross NPL ratio was unchanged q-o-q at 1.2%, and down from 1.3% a year ago. NPA coverage was also stable q-o-q at 141%, but up from 129% as at end-2qfy12. Management s concern was mainly on the mid-cap portfolio in India, but this is not a significant portion of the book. As for China, DBS highlighted that the bulk of the loan book there relates to trade financing, which is short-term in nature. Management is also careful in terms of its customers. Locally, asset quality of its consumer portfolio continues to hold up well. On the whole, management appeared comfortable with asset quality. Finally, the bank s Basel III CET-1/Tier 1/Total capital ratios remained unchanged from end-mar 2013, at 12.9%/12.9%/15.5% respectively. Other Briefing Highlights Management explained that the long-stop date of the Danamon deal was allowed to lapse as DBS could not obtain approval for the proposal as originally submitted. The bank was reluctant to go through with the deal in the absence of control, citing difficulties in driving synergies as well as the acquisition being capital punitive. Nevertheless, DBS highlighted that the group s core strategy for Indonesia was to grow organically. While the Danamon acquisition would have helped the group accelerate its growth there, the focus going forward is now on organic growth. Risks The risks include: i) slower-than-expected loan growth, ii) weaker-than-expected NIMs, iii) weaker-than-expected capital market activities, iv) deterioration in asset quality, and v) adverse impact from rising bond yields on the securities portfolio. Forecasts Our earnings forecasts are relatively unchanged. Valuation and Recommendation No change to our FV of SGD18.70, which is based on a P/BV multiple of 1.3x on the estimated June 2014 BVPS. We continue to like DBS for its: i) stronger earnings growth relative to peers, ii) cheaper valuations vs peers, and iii) healthy loan and capital market pipelines. The bank is also less vulnerable to policy changes on the property market sector, given its relatively smaller exposure to the segment. Thus, we are keeping our BUY call on the stock. See important disclosures at the end of this report 3

4 Figure 1: Quarterly results FYE Dec (SGDm) 2Q12 1Q13 2Q13 q-o-q (%) y-o-y (%) Comments Net Interest Income 1,324 1,327 1, Growth driven by higher asset volumes, partly offset by lower margins. NIM pressure (-10bps y-o-y; -2bps q-o-q) came mainly from lower asset yields (-17bps y-o-y; -5bps q-o-q), cushioned by lower average funding cost (-8bps y-o-y; -4bps q-o-q) as DBS continued to tap into the lower cost, wholesale market. Non-interest Income (6) 49 Non-market-related fee income of SGD393m (+21% y-o-y; -3% q-oq); Market-related fee income was SGD84m (+53% y-o-y; -18% q-o-q); and Trading and other income was SGD450m (+86% y-o-y; -7% q-o-q). Operating Income 1,945 2,317 2,309 (0) 19 2QFY13 non-interest income contribution was 40.1% (2QFY12: 31.9%; 1QFY13: 42.7%). Less: Overhead Expenses (872) (952) (987) 4 13 Higher mainly due to higher personnel cost (+11.8% y-o-y; +3% q-o-q). Pre-provision Profit 1,073 1,365 1,322 (3) 23 2QFY13 CIR was 42.7% (2QFY12: 44.8%; 1QFY13: 41.1%), although CIR tends to be seasonally lower in the early part of the year. Impairment on loans (104) (223) (245) 10 >100 Specific allowances were SGD128m (vs 2QFY12: SGD40m; 1QFY13: SGD114m). Y-o-y rise was broad-based as specific allowances in the past two years were exceptionally low. Specific allowances/loans stood at 22bps of loans (2QFY12: 8bps; 1QFY13: 21bps). Operating Profit 969 1,142 1,077 (6) 11 Portfolio allowances were SGD113m (vs 2QFY12: SGD64m; 1QFY13: SGD110m), with the y-o-y rise mainly due to the strong loan growth. Associates (19) (39) Pretax Profit 1,005 1,169 1,099 (6) 9 Less: Tax (143) (167) (162) (3) 13 Effective Tax Rate (%) Profit After Tax 862 1, (6) 9 Minorities (52) (52) (50) (4) (4) PATAMI (7) 10 Source: Company data, OSK-DMG See important disclosures at the end of this report 4

5 Figure 2: Cumulative results FYE Dec (SGDm) 1HFY12 1HFY13 y-o-y (%) Comments Net Interest Income 2,660 2,709 2 Led by higher asset volumes, partly offset by 12bps NIM compression to 1.63%. Non-interest Income 1,441 1, Broad-based growth with fee income staying elevated. Non-market-related fee income of SGD798m (+20% y-o-y); Market-related fee income was SGD186m (+53% y-o-y); and Trading and other income was SGD933m (+42% y-o-y). Operating Income 4,101 4, HFY13 non-interest income contribution was 41.4% (1HFY12: 35.1%). Less: Overhead Expenses (1,770) (1,939) 10 Positive jaws helped 1HFY13 CIR decline to 41.9% vs 1HFY12: 43.2%. Nevertheless, CIR tends to be seasonally higher in the later part of the year. Pre-provision Profit 2,331 2, Impairment on loans (248) (468) 89 Specific allowances were SGD242m vs 1HFY12: SGD83m. Higher SP for the South and Southeast Asia and rest of the world regions. Specific allowances stood at 22bps of loans (1HFY12: 8bps). Operating Profit 2,083 2,219 7 Portfolio allowances were SGD223m vs 1HFY12: SGD149m. Associates (35) Pretax Profit 2,158 2,268 5 Less: Tax (313) (329) 5 Effective Tax Rate (%) Profit After Tax 1,845 1,939 5 Minorities (102) (102) 0 PATAMI 1,743 1,837 5 Source: Company data, OSK-DMG See important disclosures at the end of this report 5

6 Figure 3: Gross loan book breakdown FYE Dec (SGDm) June 12 Sept 12 Dec 12 March 13 June 13 q-o-q (%) y-o-y (%) By Industry Transport, storage and communication 17,952 16,553 17,177 17,535 19, Building and construction 30,126 30,637 32,073 37,113 40, Manufacturing 27,388 26,042 26,625 31,385 32, Financial institutions 18,544 17,059 16,914 10,431 9,976 (4) (46) General commerce 37,098 35,537 38,077 46,147 48, Professionals and individuals 14,295 14,950 14,969 15,488 16, Housing loans 43,086 44,147 45,570 46,500 47, Others 19,966 20,810 22,423 22,430 23, Total Gross Loan 208, , , , , By Currency Singapore Dollar 84,216 87,617 90,503 95,110 97, Hong Kong Dollar 30,349 29,162 29,443 29,205 28,811 (1) (5) US Dollar 65,652 62,254 67,156 73,993 80, Others 28,238 26,702 26,726 28,721 31, Total Gross Loan 208, , , , , By Geography Singapore 96,075 98, , , , Hong Kong 39,565 37,538 38,119 36,733 37,760 3 (5) Rest of Greater China 30,848 27,538 30,678 36,997 41, South and South East Asia 22,226 22,751 23,045 22,357 23, Rest of the World 19,741 19,284 20,501 20,515 21, Total Gross Loan 208, , , , , Source: Company data, OSK-DMG Figure 4: NPLs by industry FYE Dec Gross NPLs (SGDm) Gross NPL Ratio (%) Sept 12 Dec 12 March 13 June 13 Sept 12 Dec 12 March13 June 13 Transport, storage and communication ,201 1, Building and construction Manufacturing Financial institutions General commerce Professionals and individuals Housing loans Others Total 2,649 2,627 2,670 2, Source: Company data, OSK-DMG See important disclosures at the end of this report 6

7 Financial Exhibits Profit & Loss (SGDm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Interest income 5,699 6,555 7,621 7,968 8,514 Interest expense (1,381) (1,730) (2,336) (2,331) (2,520) Net interest income 4,318 4,825 5,285 5,637 5,993 Non interest income 2,748 2,806 3,229 3,290 3,764 Total other income 2,748 2,806 3,229 3,290 3,764 Total operating income 7,066 7,631 8,514 8,927 9,757 Total costs x depn & amortn (2,925) (3,303) (3,614) (3,869) (4,083) Operating EBITDA 4,141 4,328 4,900 5,058 5,674 Total costs (2,925) (3,303) (3,614) (3,869) (4,083) Operating profit 4,141 4,328 4,900 5,058 5,674 Total provision charges (1,929) (722) (417) (700) (800) Post-provision operating profit 2,212 3,606 4,483 4,358 4,874 Income from associates Pre-tax profit 2,314 3,733 4,607 4,478 4,994 Taxation (454) (443) (588) (618) (792) Profit after tax 1,860 3,290 4,019 3,860 4,202 Minority interests (228) (255) (210) (266) (375) Profit after tax & minorities 1,632 3,035 3,809 3,594 3,827 Reported net profit 1,632 3,035 3,809 3,594 3,827 Recurring net profit 1,632 3,035 3,809 3,594 3,827 Balance Sheet Employment Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Net cust loans/assets (%) Net earning assets / assets (%) Non-earning assets/assets (%) Net cust loans/cust deposits (%) Equity / assets (%) Equity / gross cust loans (%) Equity & provns / gross cust loans (%) Liquid funds / cust deposits (%) Prov. charge / cust loans (%) Provision charge / avg assets (%) See important disclosures at the end of this report 7

8 Financial Exhibits Balance Sheet (SGDm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total gross loans 154, , , , ,251 Other interest earning assets 89,209 93,424 93, , ,853 Total gross IEAs 243, , , , ,104 Total provisions (2,628) (3,107) (3,309) (3,706) (3,966) Net loans to customers 152, , , , ,286 Total net IEAs 241, , , , ,139 Total investments 1,171 1,321 1,733 1,254 1,323 Tangible fixed assets 1, ,556 1,674 Intangible assets 4,802 4,802 4,802 4,802 4,802 Other assets 35,409 45,604 41,919 45,990 49,048 Total non-ieas 42,407 52,703 49,399 53,602 56,847 Total assets 283, , , , ,986 Broad deposits 206, , , , ,115 Other interest-bearing liabilities 8,558 15,658 15,741 18,000 19,300 Total IBLs 215, , , , ,415 Other non-interest bearing liabilities 35,544 45,527 34,967 43,558 45,166 Total non-ibls 35,544 45,527 34,967 43,558 45,166 Total liabilities 250, , , , ,581 Share capital 1,504 1,504 2,441 2,441 2,441 Other reserves 25,095 27,290 29,296 31,514 33,944 Shareholders' equity 26,599 28,794 31,737 33,955 36,384 Minority interests 6,503 4,275 4,261 5,423 6,021 Total equity 33,102 33,069 35,998 39,378 42,405 Total liabilities & equity 283, , , , ,986 Key Ratios Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Cust deposit growth (%) Broad deposit growth (%) Growth in IBLs (%) Return on IEAs (%) Cost of funds (%) Net interest spread (%) Net interest margin (%) Interest return on average assets (%) Return on average equity (%) Return on average assets (%) EPS growth (%) (20.0) (7.5) 6.5 Bv per share growth (%) Operating profit growth (%) See important disclosures at the end of this report 8

9 SWOT Analysis Singapore s largest bank Strong deposit franchise Stronger presence relative to peers in the North Asia region Volatile global economic conditions NIMs remain under pressure amid a low interest rate environment Management remains positive on Indonesia, which still offers strong growth opportunities Lags behind peers in terms of South-East Asia presence Relatively weaker consumer presence P/E (x) vs EPS growth P/BV (x) vs ROAE % 77% 53% 30% 7% -17% -40% % 12% 11% 9% 8% 6% 5% 3% 2% 0% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 P/E (x) (lhs) EPS grow th (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile DBS is the largest Singapore bank by assets. It also has significant operations in HK. See important disclosures at the end of this report 9

10 Recommendation Chart Price Close 20 Recommendations & Target Price 18 NR Aug-08 Nov-09 Feb-11 May-12 Buy Neutral Sell Trading Buy Take Profit Not Rated Source: OSK-DMG estimates, Bloomberg Date Recommendation Target Price Price Buy Buy Buy Buy Neutral Neutral Neutral Neutral Neutral Neutral Source: OSK-DMG estimates, Bloomberg See important disclosures at the end of this report 10

11 DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as RHBIB which in turn is a whollyowned subsidiary of RHB Capital Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. This report is therefore classified as a non-independent report. As of 1 August 2013, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) - As of 1 August 2013, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: a) - DMG & Partners Research Pte. Ltd. (Reg. No N) Kuala Lumpur Hong Kong Singapore Malaysia Research Office RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre Jalan Tun Razak Kuala Lumpur Malaysia Tel : +(60) Fax : +(60) RHB OSK Securities Hong Kong Ltd. (formerly known as OSK Securities Hong Kong Ltd.) 12th Floor World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) Fax : +(852) DMG & Partners Securities Pte. Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore Tel : +(65) Fax : +(65) Jakarta Shanghai Phnom Penh PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana Securities Indonesia) Plaza CIMB Niaga 14th Floor Jl. Jend. Sudirman Kav.25 Jakarta Selatan 12920, Indonesia Tel : +(6221) Fax : +(6221) RHB OSK (China) Investment Advisory Co. Ltd. (formerly known as OSK (China) Investment Advisory Co. Ltd.) Suite 4005, CITIC Square 1168 Nanjing West Road Shanghai China Tel : +(8621) Fax : +(8621) Bangkok RHB OSK Indochina Securities Limited (formerly known as OSK Indochina Securities Limited) No. 1-3, Street 271 Sangkat Toeuk Thla, Khan Sen Sok Phnom Penh Cambodia Tel: +(855) Fax: +(855) RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL) 10th Floor, Sathorn Square Office Tower 98, North Sathorn Road, Silom Bangrak, Bangkok Thailand Tel: +(66) Fax : +(66)