Here are 2 risks DBS must dodge

Earnings forecast edges up 2-5%.

According to Nomura, while loan growth has slowed significantly on the back of a softer Chinese economy, we see earnings growth support coming from DBS’ robust asset quality, wealth management fee income and steady ASEAN loan growth.

Here's more from Nomura:

We are raising our FY12-14F earnings forecasts by 2-5% on account of lower credit-cost assumptions (average of 25bps, vs 44bps previously), offset by more conservative loan growth and NIM assumptions.

We expect a loan CAGR of 10% over the next two years. Margins are expected to remain weak given the loose monetary policies globally. That said, we are encouraged that DBS has shown fairly stable margins ex-China, with greater focus on pricing discipline.

No asset quality issues expected – in China, DBS focuses mainly on large SOEs and quality corporate borrowers, while elsewhere in ASEAN, corporate gearing has been relatively healthy. In Singapore, our property analyst highlights the risk of a pullback in property prices which would pose a risk to investment property mortgages (estimated at 4% of total group loans).

Key risks to watch: [1] A hard landing for China would leave DBS heavily exposed, given that about 30% of the group’s asset base is in Greater China and c.60% of DBS (HK)’s lending is to the vulnerable SME segment; [2] A sharp pullback in Singapore property prices could weigh on domestic asset quality.

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