Brokers' take: CGS-CIMB downgrades DBS to 'hold', RHB maintains 'buy'

CGS-CIMB has downgraded its rating on DBS to "hold" and lowered its target price to S$28 from S$34 previously, citing that the bank's "double-digit" income growth target is a tall order.

Meanwhile, RHB has maintained its "buy" call on DBS with a target price of S$30.30, which represents a 13 per cent upside from the stock's Aug 1 close of S$26.94.

As at 4.11pm on Friday, the counter was trading at S$26.12, down 1.4 per cent, or S$0.38.

CGS-CIMB noted that DBS's second-quarter core net profit of S$1.37 billion was 5 per cent below its estimate of S$1.45 billion. The key miss came from lower net trading income, which the broker expects to remain under pressure going forward.

Nonetheless, net interest income rose 4.5 per cent quarter-on-quarter (q-o-q) to S$2.22 billion, and loan growth was 3 per cent higher, boosted by loan book expansion in Hong Kong and Singapore.

The broker added that DBS recorded lower fees and a three-year low trading income, with fees also falling 5 per cent q-o-q as wealth management shrank.

CGS-CIMB analyst Lim Siew Khee noted that trading income of S$227 million (down 23 per cent year-on-year), was at a three-year low since Q1 2015, which would see pressure in the second half this year, against the backdrop of a flatter yield curve, and widening credit spreads.

"Even the best bank cannot fight against market headwinds. With lower loan growth and trading income, we think the guided 'double-digit' income growth is a tall order," CGS-CIMB noted.

"Given the US-China trade war, the deleveraging in China, weakness in Asian currencies and potential spillover from Singapore property cooling measures, DBS now expects loan growth to be 6 to 7 per cent (from 8 per cent) in FY18, offset by better one to two basis points net interest margins (NIMS) on two rate hikes. We now expect loan growth to be 6.9 per cent (from 7.6 per cent), and NIMS to be 1.88 per cent (from 1.85 per cent)."

Separately, RHB noted that DBS's half-year earnings represented 50 per cent of its full-year forecast.

"However, both net trading income and wealth management fees contracted q-o-q. We raise our 2018 NIMS forecast to 1.87 per cent from 1.85 per cent, in line with management's guidance at the recent results briefing," RHB said.

Looking ahead, RHB expects slower growth guidance and similarly notes weakness in the bank's net trading income.

"We are forecasting a FY18 full-year dividend of S$1.20 per share. Our long-term return on equity (ROE) assumption is maintained at 13.6 per cent, consistent with management guiding for 13-14 per cent," RHB said.

The brokerage added that downside risks to its forecasts include higher impairment charges and weaker NIMs.