DBS: Better than expected 2Q

Better than expected 2Q09 results. DBS Group posted 2Q09 net earnings of S$552m, down 15% YoY but +27% QoQ, and were above the median estimate in a Bloomberg survey of S$425m. Net Interest Income improved 5.1% YoY or 3.3% QoQ to S$1112m in 2Q09. From the fee income side, the best performers were its Stockbroking (+28%YoY and +79% QoQ), Investment-related (+59% QoQ), Wealth Management (+31% QoQ) and Fund Management (+20%QoQ) units. Cost-to-income ratio also improved from 42.5% in 2Q08 to 38.4% in 1Q09 and then to a significantly lower 35.2% by 2Q09. Non Interest Income rose 22% YoY and 16% QoQ to S$680m.

As expected, impairment charges remained high. This surged from $90m in 2Q08 to $437m in 1Q09 and $466m by 2Q09 (OCBC of S$104m and UOB of S$465m for 2Q09). Net Interest Margin (NIM) was better QoQ, but down YoY. It improved from 1.99% in 1Q09 to 2.01% in 2Q09. The group has declared a dividend of 14 cents for this quarter. For 1H09, the group posted earnings of S$985m or 46% of our revised FY09 forecast.

Upping FY09 and FY10 estimates. With improving economic prospects, we have revised our earnings estimates. While we expect impairment charges to remain high, we believe that 1Q and 2Q were the peak quarters and impairment charges should come off in 3Q and 4Q. We are projecting lower charges of S$567m in 2H09 versus S$903m in 1H09. In addition, with the rally in the equity market, we expect capital market activities and feebased income to improve and we have raised our estimates for 2H09. Overall, we are increasing FY09 earnings from S$1572m to S$2128m. For FY10, we have also upped our estimates from S$1965m to S$2401m.

Maintain BUY, raised fair value estimates to S$14.65. Together with the improved economic outlook, although uncertainty still remains and unemployment is still high in the US, valuations for the three local banking stocks have also moved up higher. To reflect this trend, we are raising our valuation peg from 1.2x to 1.4x book and this in turn raises our fair value estimate from S$12.40 to S$14.65. At this price, valuation is 15.7x FY09 earnings and 13.9x FY10 earnings. Assuming that the group maintains its 14 cents per quarter dividend payout, annual yield is fairly decent at 4.4% based on current price. We are maintaining our BUY rating on DBS.

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