DBS Group: Best placed to benefit from rising short end rates

Excerpts from analysts' report

Goldman Sachs analysts: Melissa Kuang, CFA, Ben Koo,  Nicholas Umar and Selvie Jusman 

Goldman Sachs has raised its TP to S$24.5 (from S$22.9).What surprised us
DBS held an analyst briefing post 2Q15 results, where it reported core net profit of S$1,177mn (+19% yoy/-1% qoq).

Highlights from the analyst briefing:

(1) Stable NIM outlook with DBS guiding that margins would stay at 2Q level of 1.75% should SIBOR remain unchanged as the full impact from higher short end SIBOR re-pricing will be offset by downward pressures on China-related NIMs given easing monetary policy as well as likely higher funding cost in 2H15.

(2) Loan growth is guided to be 5% for 2015 with positives from strong growth from mortgages, which benefited from customers re-financing to DBS, and also corporate loans from the deals in the pipeline. Though LDR has risen to 93% from 88% in 1Q, DBS sees no liquidity concern with its LCR of 131% in 2Q15; DBS looks to maintain its LDR at 90%.

(3) Asset quality remains manageable though there were some NPLs arising from SME in SG and HK, DBS sees these as unlikely to be systematic issue. On its India portfolio, DBS commented that it will continue to see recoveries which will help to offset the rise in NPL from the SME segment.

(4) Mixed outlook for non-interest income with growth momentum in bancassurance and wealth management to continue for the rest of the year, but trading income is likely to be weaker in 2H15 from the slow economy.

What to do with the stock
We continue to see as DBS best placed to benefit from rising short end rates given its strong funding franchise and solid fee generation and maintain our Conviction Buy. We make minor changes to FY15-17E EPS. Our 12m RIM-based TP rises to S$24.5 (from S$22.9) as we roll over our TP base to 2016E. Key risks: (-) weaker loan growth, (-) lower fee income.