DBS - Q 2 beats consensus but provisioning high

DBS’s Q2 net profit beat our estimate by 10% and consensus estimate by 20%. The highlight of its results, in our view, was the higher-than-expected provisioning. The increase came mainly from its shipping and Middle East exposure. However, the credit quality in Singapore was stable while that in Hong Kong and China improved.

DBS’s earnings were ahead of estimates because of stronger trading income that benefited from the improved market conditions, and an increase in its risk appetite as measured by value-at-risk (VAR). In its core business of lending, its loan growth of 8% YoY was ahead of its competitors while its net interest margin remained relatively intact despite inter-bank rate pressure.

While we are positive about the bank growing its business when many of its competitors have taken a more defensive posture, we believe the market will be concerned about the sudden increase in provisioning outside its core markets. We plan to discuss this with management and will want to know whether this is a oneoff and whether there are any other lumpy exposures outside the main markets that could surprise.

Our price target of S$14 is derived using the Gordon Growth model with the main assumptions being ROE of 9.3%, COE of 7.7%, and terminal growth of 3%.

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