Non-interest income (NII) was key positive surprise – fee income grew 13% q-q, primarily on capital market-related revenues, while both trading and investment income surprised with q-q resilience, supporting management’s contention that de-risking of the trading operations over 2H08 will yield more stable contributions going forward. On the other hand, NPLs surprised negatively, rising a hefty +80bps q-q, to 2.8% - while this caused related overshooting in provisioning, loan loss cover has been allowed to further shrivel, declining to 68% (1Q: 85%). Peers remain near the 100% level.
Notwithstanding positive revision bias on NII out-performance, the latter’s underlying dependence on inherently volatile capital market activity sits uncomfortably with broadly weak commercial banking traction i.e. loan growth, margins, NPL formation / coverage. ROE is set to remain depressed and a discounting factor versus peers.
Our Gordon Growth-based price target (methodology unchanged, assuming 10% sustainable ROE, 10% cost of capital and 5% long-term growth) is S$10.80, implying 1.2x FY10F adjusted book value (1.0x stated book) and 14x FY10F earnings. Upside risk lies in faster-than-expected recovery in export demand; this would significantly reduce NPL stress on the balance sheet, particularly from exposure to HK/China SMEs. On the downside, while DBS’ corporate CDO exposure has been substantially provided for, the rapid pace of corporate-directed loan growth over the last two years, coupled with substantial exposure to the HK/China export-dependent SME segment and corporate debt securities, means earnings are highly vulnerable to potential spiking in corporate defaults. Further, any delay or uncertainty surrounding the replacement of DBS’ CEO Richard Stanley, who unexpectedly passed away in April, would be a discounting factor, in our view.
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