Two brokers downgraded DBS Group recently as they fear the lender would be affected by certain macro headwinds.
Local brokers RHB Invest and Maybank Kim-Eng have downgraded DBS Group's stock from Buy to Neutral and Hold respectively after the lender released its second-quarter results on Monday. RHB Invest analyst Leng Seng Choon cut his target price for the lender from S$30.30 to S$28.30, based on a forward price-to-book value of 1.37 times.
«DBS guided for 3Q19 Net Interest Margin(NIM) to be narrower by 1 basis point quarter-on-quarter (QoQ), with a further 1 to 2 basis points QoQ narrowing in 4Q19,» Leng wrote in the latest note.
In an earlier note released in July, he had trimmed 2020 and 2021 NIM assumptions by 6 - 8 basis points following the Fed chairman's comments about interest rates. «However, this negative is offset by stronger non-interest income, particularly from the wealth management segment, as trading could pick up with stimulation from the interest rate cuts. Hence, our 2020 and 2021 earnings are both only lowered marginally by 1 percent.»
Tick-Up in NPLs
Maybank Kim-Eng analyst Thilan Wickramasinghe noted that DBS' 2Q19 total non-performing loans (NPLs) increased 3.3 percent year-on-year (YoY) – the fastest since 3Q17 – signaling trade war-related macro headwinds, particularly in Singapore, HK/China, and Southeast Asia.
«Bad loans in sectors such as manufacturing (+11% YoY), building & construction (+10%) and general commerce (+10%) saw notable advances. Given MKE Economics team’s trade war-related bearish outlook for the region, particularly recession fears in Singapore, as well as uncertainty in HK/China, we raised 2019E and 2020E provisioning costs by 38-50 percent. This puts average credit charges for this period (30bps versus. 20bps earlier) close to the past 5-year cycle,» he wrote.
Slower Growth
Given the increased uncertainty from slower economic growth, potential rate cuts, and souring asset quality, Wickramasinghe lowered 2019 to 2021 earnings by 5-7 percent and lowered his target price for the stock from S$29.46 to S$28.05.
During a media briefing on Monday, DBS Chief executive Piyush Gupta said that second-half growth could be slower than last year's, even as the bank reported a 17 percent increase in net profit of S$1.6 billion for 2Q19. Given a declining interest rate environment and with the economy slowing down, he said: «we won't be able to sustain a double-digit topline growth».
DBS Group's share price dipped slightly from S$27.01 at open to S$26.64 on Monday.
