SINGAPORE (Oct 24): UOB KayHian expects DBS’ consolidation of ANZ’s wealth management and retail banking businesses in Singapore and Hong Kong to boost loan and fee income growth in 3Q.
In addition, downsizing of the Fed’s balance sheet and more interest rate hikes in the US will be positive for DBS due to its strong deposit franchise.
“Maintain ‘buy’ with target price of $24.48,” says analyst Jonathan Koh.
UOB expects DBS’ loan growth to accelerate to 2.5% in 3Q from broad-based expansion of corporate loans and residential mortgages. The group has also consolidated ANZ’s wealth management and retail banking businesses in Singapore and Hong Kong, which is expected to add deposits of $17 billion, loans of $11 billion and wealth AUM of $23 billion.
“We expect the consolidation of ANZ’s wealth management and retail banking businesses to pressure NIM due to the addition of low-margin loans for high net worth clients and lower loan/deposit ratio to 87.9% from 89.7% in 2Q17,” says Koh.
However, Net Interest Margin is forecast to stay flat at 1.74%. Although three-month SIBOR and SOR rose to 1.12% and 0.95% in 3Q17, the positive impact on NIM would largely be felt in 4Q17 as loans are re-priced gradually over time, adds Koh.
The analyst also expects fee income to increase 6.7% y-o-y to $655 million in 3Q17. This is supported by 14.4% y-o-y growth from wealth management, boosted by contributions from ANZ’s wealth management business.
“We expect robust contributions from investment banking as DBS completed the IPO of NetLink NBN Trust, the largest IPO in Singapore year to date,” says Koh.
Meanwhile, Koh has factored in net trading income of $250 million for 3Q17, which is slightly more subdued compared to the run rate in 1H17.
DBS is also expected to maintain cost-to-income ratio at 43.5% due to investments in digitalisation and efforts in cost management.
As for non-performing loans, Tan expects NPL ratio to inch higher by 3bp q-o-q to 1.48%. Provisions are also expected to increase 23.7% q-o-q to $376 million due to provisions for new and existing NPLs due to deterioration in valuations of collaterals.
“We expect DBS to incur specific provisions of $1,081 million for 2017 compared to previous management guidance of $1,000 million,” says Koh.
As at 11.28am, shares in DBS are trading 2 cents higher at $21.97.