Event
DBS Group’s 2Q11 results were in line with expectations, raising firsthalf profitability by 23% YoY and putting the group on course for a record year of profitability. By and large, most of the strategic initiatives put in place by CEO Piyush Gupta have gained traction and there may be an opportunity to rewrite the group’s history of underperformance. Maintain BUY.
Our View
DBS’s 2Q11 net profit came in at $735m, up 2% YoY but down 9% QoQ. Net interest income posted healthy growth of 12% YoY and 7% QoQ on strong loan growth. Loans grew by 15% YoY and 7% QoQ thanks to robust demand from corporates amid a slowdown in the residential market. Net interest margin showed signs of bottoming out, remaining stable at 1.8% for the fourth quarter.
2QFY11 numbers were dragged down by poor market‐related income, just as we had expected. Non‐interest income shrank by 15% YoY and 19% QoQ, largely due to a decline in fees from investment banking/stockbroking as well as trading income. The cost‐to‐income ratio was stable at 43% with the NPL ratio falling to 1.5%. ROE for the quarter was 10.6% (11.1% for 1H11).
On a positive note, the group’s regional drive achieved progress with double‐digit growth seen in China, India, Taiwan and Indonesia. Its Hong Kong operations also showed marked improvement in the last few quarters; 1H11 earnings rose by 51% YoY excluding account currency translation. The ability to offer offshore‐Hong Kong services has been critical in its drive for mainland China business, especially in the field of trade financing which outperformed this quarter (Greater China ex‐Hong Kong loans grew 34% this quarter).
Action & Recommendation
Among the three local banks, DBS offers the best promise for overseas growth and structural improvement in ROE performance. Our target price, based on the Gordon Growth Model, is raised to $17.60, implying 1.42x FY11F P/B and 3.5% dividend yield. Maintain BUY.
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