DBS : BUY (Target : S$25.00)
DBS reported 2007 net profit of S$2.28b, flat versus 2006's S$2.27b. This is marginally lower than our S$2.40b forecast, primarily due to higher allowances for credit and other losses.
Net interest margin narrowed 3 bps to 2.17%. Net interest income rose 14% to S$4.11b, driven by gross loan expansion of 25%. However, NIM narrowed 3 bps, due to lower interest margins in HK. The recent margin squeeze was more pronounced - 4Q07 NIM of 2.11% was down from 3Q07's 2.14%, due to lower HK prime lending rate, and lower interbank asset yields. Given the continued weak SIBOR, we expect margin to remain narrow in the quarters ahead. But DBS loans expansion could still drive net interest income expansion.
Non-interest income rose 11%. Fee & commission income (71% share of non-interest income) surged 27% to S$1.46b. The key contributors were a) stockbroking (+77% or S$109m); and b) wealth management (+46% or S$79m). Net income from financial investments was up 97% to S$450m. However, net trading income collapsed 66% to S$180m as the fallout from the US sub-prime mortgages impacted the credit trading portfolio and structured credit business. This was further compounded by marked-to-market losses from Rosa's CDOs.
Though specific allowances for loans fell to S$16m, specific allowances for non-loan assets was a high S$100m, inclusive of a S$117m charge for the S$267m of investment CDOs with exposure to US sub-prime mortgages. General allowances of S$66m included S$53m for investment CDOs with exposure to US sub-prime mortgages and another S$30m for the balance S$944m of investment CDOs.
DBS declared a final dividend of 20¢ ps (one-tier tax-exempt). Total 2007 dividends amounts to 80¢, which is more than 2006's 76¢.
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