SINGAPORE (Nov 7): DBS reported a sharp 25% y-o-y drop in 3Q17 net earnings to $802 million, and below Bloomberg consensus of $1.14 billion. This was due to a spike in allowances, which rose to $815 million in 3Q17 from $304 million in 2Q17.
See: DBS reports 25% lower 3Q earnings of $802 mil on higher net allowances
Total exposure to the oil and gas support services industry amounted to $5.3 billion, and taking into account the impending implementation of FRS109, it has accelerated the recognition of Non-Performing Assets (NPAs) with a matching increase in specific allowances.
It drew on $850 million from general allowance reserve, resulting in a net allowance charge of $815 million. As of Sept, its oil and gas support services NPAs amounted to $3.0 billion, of which cumulative specific allowances of $1.5 billion have been made. NPL rate rose from 1.5% in the previous quarter to 1.7% this quarter.
Net Interest Income rose 9% y-o-y to $1,975 million, while Non-interest Income fell 3% y-o-y to $1084 million. Total income before allowances rose 3% y-o-y to $1,761 million.
Net Interest Margin (NIM) was fairly flat at 1.73%, down slightly from 1.74% in 2Q17. Cost-to-income ratio dropped to 41.1% for the quarter.
Although OCBC is downgrading its rating to “hold”, the research house has raised its fair value estimate to $23.52 from $22.50 based on 1.2 times book value. It also recommends investors accumulate at $22.00 or lower.
Management is guiding for loans growth of 7-8% this year and next. It expects double-digit topline growth for 2018, and better contribution from the ANZ merger.
However, management is still cautious about the outlook for the oil and gas sector. But with the move to clean up its book, they do not expect to have to do further provisions.
“Since our upgrade on Sept 14, the stock has done well and closed at $22.97 last Friday, up some 12.7% since mid-September,” says analyst Carmen Lee.
Meanwhile, UOB is maintaining its “hold” on DBS now that its share price is now at $22.79, above its target price of $22.75.
DBS’ 3Q core PATMI of $0.8 billion came below UOB’s and Bloomberg consensus expectations.
Ng says the new NPAs of $1.7 billion were equally split between the larger five names and smaller name accounts.
With the chunky exposures recognised as NPAs and provided for, UOB is cutting DBS’ FY18-19 provisions by 20-24%, barring any significant deterioration in other sectors.
“We cut our FY17 net profit by 8% to factor in higher provisions, but raised FY18-19 net profit by 6-8% on higher income, and lower expenses and provisions,” says analyst Ng Li Hiang.
Elsewhere, RHB is lowering DBS’ FY17 forecast earnings and maintaining its “neutral” recommendation, with a slight increase in target price to $21.45.
Post results, RHB is lowering its 2017 net profit forecast by 6% to factor in weak 3Q17 earnings. The research house is also forecasting NPL ratio of 1.6% by end-2018, from 3Q17’s 1.7%.
“While we are projecting NPL ratio to rise further to 1.8% by end-2017, we forecast a decline through 2018,” says analyst Leng Seng Choon.
Although 3Q17’s NIM of 1.73% was marginally narrower than 2Q17’s 1.74%, due to lower interest rates, Leng expects future SIBOR/Singapore Swap Offer Rate (SOR) strength could help widen its 2018 NIM to 1.77%.
Leng also projects 2017 and 2018 loan growth of 7% and 5.5% respectively.
Finally, CIMB likes the fact that DBS was the first among peers to recognise the implications of FRS 109, noting that its general provisions (GP) reserves now exceed the required level.
New NPAs of $2.06 billion were recognised in 3Q17 and NPL ratio rose to 1.7%. GP stock after drawdown stood at $2.6 billion, above the 1% MAS and FRS 109 requirements.
“We view the move to kitchen-sink its oil & gas loans positively. This allows the bank to start 2018F with a clean slate,” says analyst Yeo Zhi Bin.
‘With the “cleanest” book among peers, healthy business momentum and most likely to benefit from rising rates, we upgrade DBS to ‘add’,” says Yeo who has a target price of $25.00.
Other positives from the 3Q17 results were the 4% q-o-q increase in loan volumes and sustained business momentum, which underpinned non-NII, adds Yeo.
Shares in DBS are up 71 cents or 3.12% at $23.50 or 11 times OCBC’s FY18 forecast earnings.
