Daiwa: DBS is ‘entering the growth phase with a bang’

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DBS is “entering the growth phase with a bang,” Daiwa said in a note on Monday, noting first-quarter results beat its forecasts.

On Monday, DBS reported first quarter net profit surged 26 percent to a record S$1.52 billion. Its net interest income rose 16 percent on-year to S$2.13 billion on higher loan volumes and its net interest margin increased by 9 basis points to 1.83 percent on higher interest rates.

Daiwa said net profit beat its forecast by 10 percent.

“The positive surprises came from stronger-than-expected wealth-management fee income, trading income, a Hong Kong property disposal, and credit costs of 20 basis points vs. our forecast of 26 bps,” it said. “The oil and gas related clean-up in the third quarter of 2017 is already showing positive results as the non-performing loan (NPL) ratio declined quarter-on-quarter from 1.7 percent to 1.6 percent in the first quarter of 2018 and new NPL formation of S$195 million was at the lowest level since the second quarter of 2014.”

Daiwa raised its 2018-20 earnings per share (EPS) forecasts by around 6 percent after raising loan-growth assumptions to 7-8 percent a year from 6-7 percent; it also raised its non-interest income forecasts by 3-5 percent and lowered its credit-cost assumptions to 20-22 basis points from 24-25 basis points.

It raised its target price to S$32 from S$30, keeping an Outperform call, saying DBS was transitioning “smoothly into the growth phase of the banking cycle.”

It said price-to-earnings valuations were “relatively undemanding” at 10-13 times for 2018-20, while the three-year earnings per share (EPS) compound annual growth rate (CAGR) of 22 percent was industry leading.

“Along with growth, DBS is also an attractive yield play with dividend yields of 4-4.8 percent, based on our forecasts,” Daiwa said.

DBS ended Wednesday down 0.75 percent at S$30.61, after touching a fresh record high of S$31.28 intraday.