DBS’ earnings to drop 10% in 2Q11

Expect 2Q11 earnings of S$727m, results on 28 July. DBS is due to announce its 2Q11 results on 28 July. We expect earnings to be 10% lower qoq with trends such as: 1) flat-to-marginal uptick in margins, strong 4%-qoq loan growth eking out 2%-NII growth; 2) fee income falling slightly at 4-5% qoq as exceptionally strong 1Q IB fees pare down; 3) trading gains falling 30-33% back to the more sustainable S$230-250m, following a strong 1Q where traders did well, customer-flows still dominant; and 4) cost ratios nudging up to ~44% and management guides <45% as effects of hiring spree show up. In short, we expect all engines to be firing again, with the exception of trading.

We expect 2Q PPOP of S$1,005m and net profit of S$727m. 2Q10 had a large S$1bn goodwill charge for DBS HK and a huge swing on headline profit yoy, should not be taken as it is. Positive data points possibly highlighted by management would be strong growth from India.

We believe that the strong loan volume growth in 2Q would be no surprise. MAS’ April and May system loans had already showed amazing volume strength. The positive surprise for banks could well be margins. Our ground checks suggest that lending spreads in Singapore have stopped contracting already, though not improved yet. Margin trends from each banks’ overseas markets becomes the swing factor, hence.

Consensus sees no hope for DBS margin to surprise on the upside, until Fed Fund rates rise; if margins rise by 3bp or more, that could be a share price catalyst. The other upside we see is in IB fees. Although 1Q was strong because of the Hutchison Ports IPO, 2Q might still be sizable as DBS also involved in Glencore and it was a lead coordinator of a 364-day revolving credit for Vitol.

The downside we see is in trading. We do not doubt that a positive evolution in DBS has taken place, post-management restructuring. Successful cross-sell initiatives and fast-to-market Rmb product structuring had been instrumental for five quarters of strong trading-related fees already. However, 1Q trading was also abnormally strong because of positive trading outcomes and CEO Piyush Gupta himself guided that this was not sustainable.