DBS - Expect good loan growth but NIM flatness in 2Q11 (DMG)

NEUTRAL

Price S$14.94

Previous S$15.00

Target S$15.00

Expect unexciting 2Q11 earnings… We are forecasting DBS 2Q11 net profit of S$720m, representing a 11% QoQ decline from 1Q11’s S$807m. This factors in sequentially lower net trading income and slightly higher provisioning. We see net interest income remaining unexciting. As we expect SIBOR to remain soft till mid-2012, we see little catalyst driving DBS share price. DBS remains NEUTRAL with target price of S$15.00, pegged to 1.3x 2011 book, close to the historical average of 1.35x P/B.

… with risk of lower net trading income. This weakness is largely attributed to (1) our estimate of lower 2Q11 net trading income – recall that 1Q11 net trading income rose a sterling 57% QoQ, which was driven by robust customer flows from both corporate and consumer customers. The non-customer segment of trading income is typically volatile; and (2) higher provisions sequentially (after 1Q11’s 20% QoQ decline).

DBS net interest income seen to be unexciting. SIBOR remained soft in 2Q11, with the 3-mth SIBOR averaging 0.44%, similar to that for 1Q11. Whilst we expect good loan growth (MAS data showed industry May 2011 loan expanding 12.6% YTD), the softness in SIBOR will negate the positive, as DBS has a low S$ loan-deposit ratio of 60% (versus OCBC’s 82% and UOB’s 77%). We expect NIM to remain close to 1Q11’s 1.80%, and sequentially flattish net interest income. However, we have raised our DBS FY11F loan growth to 13.5%, from 11.5% previously. Correspondingly, our FY11 net profit forecast has been raised by 2.7% to S$2.89b.

We note that 1Q11 provisioning of S$125m was lower than the 2010 quarterly average of S$228m. Whilst we note that Singapore economic conditions remain good, we assume that DBS may book in sequentially higher 2Q11 provisions.

Other Key Highlights:

HK mortgage rates have risen over past few months. There has been some increase in HK home mortgage rates in the recent few months. From a spread of ~1.6% over HIBOR six months ago, the spread is now ~2.3% over HIBOR. However, it should be noted that HK deposit costs have also risen due to competition (1) the attractiveness of CNH deposits has added upside pressure on HK$ deposit rates (2) China banks using HK as a booking centre for USD loans has led to shortage in US$ and HK$, and added upside pressure on HK deposit rates. NIM pressure on DBS HK should ease on the back of the increases in both lending and deposit rates.