Operating profits were lifted by gains in trading and sale of investment securities and loan-related fees, which could be volatile. In addition, rising provision charges remain a bugbear. Specific allowances continue to be hefty at $225m while general allowances doubled against the economic uncertainties. Provision risk is likely to remain high on the back of surging NPLs (+129% yoy) in particular from overseas. Charges for Hong Kong SME loans are expected to remain at elevated levels.
Gross customer loans rose 3% qoq. Excluding the 2% growth from translation effects, loans growth was due largely to Singapore-dollar corporate borrowing for infrastructure projects. DBS increased its market share of Singapore-dollar loans from 20% to 21%. We expect net interest income to remain resilient in view of its strengthening Singapore franchise and easing margin compression as SIBOR hit historical lows. Sufficient capital also put the group in a good position to expand its market share further.
The group maintained its quarterly payout of 14 cents per share. This works out to a dividend payout of above 70% that is way above its past dividend payout of below 50%. With a strong capital strength supported by strong Tier-1 CAR of 12.5% after a $4bn rights issue and a coverage ratio on unsecured NPA of 156%, we believe the group has room to sustain its attractive dividends payout.
We have raised our earnings estimates for FY09 by 8% to reflect the strong quarter and increased our FY10 earnings to reflect better cost efficiencies. At 1.16x FY09 PBV, DBS’s valuation is still very attractive relative to its peers which are trading near 1.5x PBV. We are reiterating our BUY recommendation on DBS with a higher target price of $13.90, pegged to its recovery stage forward PBV of 1.36x.
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