DBS Group - Better cost management, but outlook still challenging
Forecasts slightly raised on lower costs; HOLD
- We raised our forecasts and TP to reflect lower costs as we turn more positive on DBS’s efforts on cost rationalization. But fundamentally, our outlook has not changed; we reiterate HOLD.
- Banks are struggling with sluggish loan demand and likely to face pricing pressures to grow market share for loans in Singapore.
- In the face of worsening asset quality amid the turning credit cycle, we think DBS can retain or even grow profitability from better cost containment.
Cost containment could be better than expected
- We have revised our cost assumptions in light of management’s cost-income ratio (CIR) guidance and recent news of further cost rationalization by the bank.
- Management expects CIR to be 43-44% for FY16E. Accordingly, we turn more positive on its cost management vs peers (CIR for UOB/OCBC: 45-46% for FY16-18E). We now estimate CIR to be ~44% for FY16-18E (from 45-47% previously) as we think it can continue to drive down expenses from strategic cost management and digitalization efficiencies.
TP raised 8% to SGD15.68
- With that, we revise net profits upwards by ~2-7% for FY16-18E.
- Our TP is raised by 8% to SGD15.68 based on ~0.9x FY17E P/BV (from 0.8x FY17E P/BV), close to -1SD below the historical mean to reflect our lower forecast ROE compared to prior periods.
- With the change in EPS, our assumed sustainable ROE is now 9.6% (9.1% previously), COE of 10.5% and growth rate of 3.5%. Maintain HOLD.
- Ability to reprice loans at higher interest rates and lower costs of funding from large pool of CASA deposits.
- Higher non-interest income from wealth-management and Manulife bancassurance businesses.
- Sharp and sustained rebound in commodity prices.
- Asset quality better than expected with no major credit slippages and proactive loan restructuring.
- Higher demand for domestic mortgages from easing of cooling measures.
- Translation benefits from appreciation of USD/HKD.
- Highest asset-quality risks from exposure to North and South Asia and O&G sector.
- Sharp decline in the value of securities and shocks in fixed-income portfolio.
- Job losses in Singapore become pervasive, hurting mortgage portfolio.
- Lack of liquidity of a funding currency.
- Emergence of dominant financial competitor in Singapore.
- Capital-raising by peers.