RHB downgrades DBS on expectations net interest margins hit their peak

DBS ATM in SingaporeDBS ATM in Singapore

RHB downgraded DBS to Neutral from Buy on expectations the bank’s net interest margin (NIM) likely hit its peak in the second quarter.

DBS reported Monday its second quarter net profit jumped 20 percent on-year to S$1.60 billion on corporate loan growth, a higher net interest margin, record fee income and improved trading performance.

The closely watched NIM, or the difference between the interest rate banks charge to lend and their cost of funds, rose to 1.91 percent, up from 1.85 percent in the year-ago period, and beating analyst expectations for 1.89 percent or 1.90 percent. That was as loans in Singapore and Hong Kong were repriced with higher interest rates, DBS said.

RHB said first half net profit came in at 52 percent of its full-year forecast.

The brokerage said it was raising its forecast for 2019 net profit by 2 percent on the second quarter’s stronger net trading income, but it cut its 2020 and 2021 net profit forecasts by 1 percent and 4 percent, respectively, on its expectations NIM would contract ahead.

At a post-earnings press briefing Monday, DBS CEO Piyush Gupta estimated that if the U.S. Federal Reserve cuts its benchmark interest rate by 25 basis points — as is widely expected — that would knock a “basis point or so” off DBS’ NIM in the third quarter. If the Fed cuts rates a second time later this year, that would likely knock another 1-2 basis points off the fourth quarter’s NIM, Gupta said.

RHB said it was forecasting 2019 and 2020 NIM at 1.88 percent and 1.86 percent, respectively.

It cut its target price to S$28.30 from S$30.30.

But the brokerage added wealth management showed “potential,” noting the segment’s income rose 17 percent on-year in the first half.

“We remain bullish on wealth management contributing to income growth, particularly with the expected [federal funds rate] cuts creating more investment opportunities for high net worth individuals,” RHB said in a note Monday.

Shares of DBS were down 0.60 percent at S$26.48 at 3:15 P.M. SGT.

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