DBS: Downgrade to HOLD though Better than expected 1Q09 earnings

Better than expected 1Q09 earnings. DBS posted 1Q09 net earnings of S$433m, down 28% YoY and 47% QoQ. This was above market estimates (with Dow Jones consensus estimate of S$353m). Net Interest Income rose 2% YoY, but was down 4% QoQ to S$1076m. With Non-interest Income of S$586m, up 63% QoQ, total income improved 6% YoY and 13% QoQ to S$1662m. Net Interest Margin fell from 2.04% in 1Q08 and 2.09% in 4Q08 to 1.99% in 1Q09. This was due to a decline in Singapore interbank rates, but partly offset by higher credit spreads and prime-HIBOR spreads in Hong Kong. Fee and commission income fell 10% YoY (but was up 21% QoQ) to S$317m due to weak capital market activities.

Allowances surged 3x YoY. Total expenses fell 3% YoY and 7% QoQ to S$638m, resulting in cost-to-income ratio of 38.4%, down from 42% in 1Q08 and 46.8% in 4Q08. As expected, allowances surged, up 3-fold YoY or 38% QoQ to S$437m. This comprised of specific loan allowances of S$225m. NPL doubled YoY to S$2721m, while NPL ratio rose from 1% in 1Q08 and 1.5% in 4Q08 to 2.0% in 1Q09. This compares with 2.1% for UOB and 1.8% for OCBC in 1Q09. Management has declared a 1Q dividendof 14 cents payable on 4 Jun 2009.

Downgrade to HOLD, but raising fair value estimate to S$12.40. Management expects NPL to remain high (2% currently), although deterioration appeared to have stopped. We expect impairment charges to remain high for 2Q and 3Q, although at lower level than 1Q, making full year charges of S$1386m. We have revised our numbers and raised net earnings from S$1328m to S$1572m for FY09 taking into account slightly better 1Q09 performance. As the worst appears to be over for the global economy, we have also raised our expectations for FY10, increasing net earnings from S$1723m to S$1965m. Since our last report in Mar 2009, the stock has appreciated some 64% to S$11.90 currently. With the recent re-rating for Singapore banking stocks, with average P/book of 1.4x, we are raising our fair value estimate to S$12.40 (based on 1.2x book, the discount being for the still cautious economic environment). However, until we see clearer increase in regional trades and activities, price upside looks limited at current price level. As such, we are downgrading the stock to HOLD.

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