DBS by DMG

Expect sequential weakness in investment gains
Expect lower provisions to drive earnings YoY growth. We are forecasting 4Q10 net profit of S$642m, up 30% YoY. The expected S$149m YoY improvement is largely attributed to 1) lower provisions – we forecast 4Q10 provisions of S$101m, versus 4Q09’s S$384m; and 2) higher other operating income of S$235m, versus 4Q09’s S$87m – DBS recorded a strong 9M10 other
operating income of S$1,086m, largely due to trading income improvement.
These will, however, be partly offset by 4Q10 taxes of S$159m, compared with a S$47m writeback in 4Q09. As we expect SIBOR to remain soft till 3Q11, we see no catalyst for DBS share price to trend up. Maintain NEUTRAL on DBS with a target price of S$14.30, pegged to 1.22x 2011 book.
Soft SIBOR likely to have led to YoY decline in net interest income. SIBOR remained soft in 4Q10, with the 3-mth SIBOR averaging 0.45%, close to 3Q10’s 0.54%. As DBS has a low S$ loan deposit ratio of 61%, the soft SIBOR is a negative for DBS’ interest earning yield. In addition, we expect the trend of narrow DBSHK NIM to persist, given the deposit competition in the HK market.
Hence, we expect 4Q10 NIM to be narrow, similar to 3Q10’s 1.80%. Following the 1.2% QoQ loan growth in 3Q10, we expect DBS to register a 1.6% sequential loan expansion in 4Q10. Factoring in the above, we forecast net interest income to be marginally weaker YoY.
4Q10 trading and investment income may be weaker sequentially. DBS recorded 3Q10 trading income of S$223m, which is 4x that of 3Q09’s S$56m. 3Q10 gain from financial investments of S$123m was a multiple of 3Q09’s S$7m, due to profit taking on investments. In 4Q10, Singapore government bond yields rose – with the 10-yr yield rising 69 bps to end-2010’s 2.7%. We believe this will lead to lower trading and investment income in 4Q10. We have reduced our expectations of trading and investment income and this led us to lower FY10 net profit by 2% to S$1,596m.