SINGAPORE (May 3): RHB and Maybank Kim Eng Research are reiterating their “neutral” and “hold” calls on DBS Group at price targets of $20.50 and $19.86 respectively, up from the previous $19.35 and $18.13.
This comes after the banking and financial services group on Tuesday posted a 1Q17 net profit of $1.2 billion, up 1% on record fee income.
(See also: DBS 1Q net profit up 1% to record $1.2 bil on fee income)
The latest quarter’s results were in line with the expectations of the two research houses, which both see positive signs and hence raise their ROE and FY17F net profit estimates for the group accordingly.
However, RHB analyst Leng Seng Choon says he sees a limited share price upside from here as he believes DBS is trading close to its historical price-to-book ratio – while Maybank’s Ng Li Hiang thinks provisions will stay elevated in the year ahead even as new nonperforming asset (NPA) formation is likely to ease.
“We forecast non-performing loans (NPL) ratio to rise to 1.6% by end-2017, from 1.4% in 1Q17. Whilst stress from the oil & gas sector has somewhat abated, the risk remains if crude oil price stays weak. A challenging economic environment could also pull up the NPL ratio,” says Leng in a report on Wednesday.
Noting that DBS has gained Singapore’s mortgage loan share over the past two years, RHB projects 2017 loan growth of 4% for the group as well as net interest income (NII) expansion of 2% – even as the group’s management guided for 2017 net interest margin (NIM) to be close to its 2016’s average of 1.77-1.78% in the case of only one more US Fed rate hike this year.
On the other hand, Maybank is largely retaining its FY17-19 provision estimates which the research house believes will stay elevated.
“Despite healthy loans growth at 7% y-o-y in constant currency terms, NII was flat q-o-q / y-o-y, and customer spreads fell slightly to 1.99%. We believe lending yields could be under compression from market share gains/competition,” remarks Ng in a separate report on the same day.
In Ng’s view, the group’s wealth management (WM) fees in particular are poised to contribute to higher non-interest income which will in turn provide support to total income.
“If we strip out the amortised bancassurance contributions from Manulife of $26.5 million per quarter, WM fees grew a remarkable 49% q-o-q/31% y-o-y. We believe DBS is well-positioned in its digitalisation efforts and capabilities to capture market share gains in WM,” he adds.
Meanwhile, UOB Kay Hian maintains its “buy” rating on DBS while also raising its target price on the stock to $23.30 from $21.50 previously on the account of NPL formation and specific provisions easing sequentially.
“NPL formation and specific provisions have peaked and uncertainties from exposure to the oil & gas sector have diminished. DBS has a track record of consistency in execution and delivering good results,” elaborates analyst Jonathan Koh in a Wednesday report.
In addition to the turnaround in NIM, Koh continues to like the stock post 1Q17 results, noting “strong sequential recovery” from the wealth management segment; improved cost efficiency which has led to reduced operating expenses; as well as the easing of pressure on asset quality over the past quarter.
The research house has hence raised its net profit forecast for 2017 and 2018 by 6.9% and 8.2% respectively, citing strong growth in fees and moderation in NPL formation and credit costs.
As at 10.37pm, shares of DBS are trading 3.57% higher at $20.57.
