DBS Group share price: modest guidance has analysts lowering targets

Singapore financial institution DBS Group Holdings Limited's share price has been trading sideways since it released its Q4 FY2019 financial results last Thursday 13 February.

This tepid market reception is more a result of the company being forced to evacuate over 300 staffers from its Singapore headquarters on 12 February after an employee tested positive for the coronavirus, than because of subpar earnings.

In fact, earnings-wise, it was quite the opposite. The lender’s net profit for the full fiscal year rose a solid 14% to S$6.39 billion. Total income increased 10% to S$14.5 billion from broad-based business momentum despite external headwinds. Return on equity advanced from 12.1% to a record 13.2%.

Fourth-quarter earnings increased 14% year-on-year to SG$1.51 billion, beating the average Refinitiv analyst estimate of S$1.48 billion. Meanwhile, total income rose 7% to S$3.46 billion from loan growth and a double-digit improvement in fee income.

By business unit, Consumer Banking / Wealth Management income rose 11% to S$6.3 billion led by deposit and investment product income. Institutional Banking income grew 5% to S$6.07 billion from higher cash management, loans and investment banking income. Treasury Markets income increased 39% to S$932 million as the unit benefitted from more conducive market conditions than the previous year.

Company guidance for FY2020: revenue impact of 1-2%

With FY2019 now fully accounted for, all attention is now turned to FY2020. With the coronavirus now at the top of most investors’ minds, Group CEO Piyush Gupta has provided the following guidance:

‘Pre-virus, outlook on track to previous guidance. Assuming virus is controlled by summer, full year revenue impact of around 1-2% – specific provisions could rise by a few basis points of loans; general provisions provides cushion’.

Prior to the virus outbreak, the group was on track to hitting its original guidance of a mid-single digit loan growth rate for FY2020.

For now, the bank expects the virus to have an impact on earnings at least for the first fiscal quarter of 2020.

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DBS Group CEO: ‘permanent revenue loss’ from travel and hospitality

Gupta also noted that some revenue headwinds are expected to come from a slowing card business on the back of lower consumer spending, as well as lower wealth management and treasury sales in the small and medium enterprise segment.

He cautioned that there could be ‘more permanent revenue loss’ from consumer consumption and services in the travel, hospitality, retail, and aviation sectors. He said the expected loss will ‘impact their numbers for this year…it’s not just a shift by three to four months’.

Still, Gupta is optimistic that the majority of DBS's client base in this sector – worth about S$20 billion in total with the bulk of it in Singapore – will be able to withstand ‘a few months of cashflow shortfall’ as they are ‘very resilient’.

Furthermore, he does not ‘see an impact on the cost of credit flowing through the P&L (profit and loss statement) because of the general provisions’ that the bank had originally built up as a safeguard against the US-China trade conflict and the social unrest in Hong Kong in the first nine months of 2019.

What analysts say

In view of this modest outlook, analysts from OCBC’s research team have maintained a ‘hold’ rating and price target of S$27.50 on DBS Group’s stocks, adding that dividends are likely to remain a ‘steady support given its solid balance sheet’.

‘We expect share price performance ahead to be influenced by the Hong Kong/China outlook (given its relatively higher exposure to the region vs sector average), asset quality trends, NIMs, and dividend policy,’ OCBC analysts said in a note.

Meanwhile, UOB Kay Hian analyst Jonathan Koh has maintained a ‘buy’ rating on the stock with a price target of S$28 per share, down from S$28.65 previously. He also lowered his net profit forecast for the group by 2.2% to S$5.91 billion for FY2020, attributing it to slower estimated growth in fees and commissions of 3.7%, as compared to the previous rate of 8.4%.

He added that wealth management and credit cards fees are also likely to be affected by the coronavirus crisis.

Finally, RHB Invest gave the stock a ‘neutral rating’ and lowered its price target from S$25.80 to S$24.80 per share.

DBS Group’s shares are trading at S$25.33 as of 11PM on 18 February.

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