DBS - Riding On Fed Funds Rate Hikes
- Despite DBS’ strong share price performance since the US presidential election, the positives from expected higher Singapore interest rates have not been fully priced in.
- Since the US election, the Singapore 10-year government bond yield has jumped ~40bps to 2.298%. We expect SIBOR, which rose at a more subdued pace, to increase more sharply going forward.
- DBS’ earnings would rise the most (vs peers) from every bps rise in SIBOR. As such, it remains our Top Pick.
- Our TP of SGD18.38 factors in a long-term ROE assumption of 10.2%.
Earnings would gain the most from any SIBOR rise.
- Our sensitivity analysis shows that, in a steady state, a 10bps rise in the SIBOR could raise DBS’, OCBC’s and UOB’s net profits by 1.7%, 0.8% and 1.2% respectively. DBS is, thus, seen as a key beneficiary of the expected SIBOR rise.
Singapore bond yields have surged.
- Since the 8 Nov US presidential election, sovereign yields have surged. The US 10-year Treasury yield is now 2.387%, compared with 1.826% at end-Oct 2016.
- Similarly, the Singapore 10- year government bond yield has also jumped to 2.298%, from 1.887% at end- Oct 2016.
SIBOR uptrend has begun.
- The market expects the Fed Funds rate to rise further in 2017. Given the positive correlation between the US Fed Funds rate and SIBOR, we believe SIBOR would be on an uptrend.
- The 3-month SIBOR has already risen to 0.93%, from end-October’s 0.87%, and further increases can be expected through 2017.
Oil & gas provisions have largely been priced in.
- We note that some market players remain concerned as to DBS’ exposure to the oil & gas space. As of Sep 2016, DBS has SGD16bn worth of loans in this category. This represents 5.4% of its loan book.
- DBS management has guided for 2017 cost of credit to be similar to the level for 2016, excluding the provisions made for Swiber. We forecast 2017 credit cost of > 40bps, higher than 9M16’s 32bps – which implies that our earnings forecasts are conservative.
- The end-November OPEC agreement to share production cuts could lead to firmer crude oil prices and reduce some pressure on oil & gas plays.
- Maintain BUY, with our GGM-derived TP of SGD18.38 premised on a CoE of 10.1% and ROE of 10.2%.
- Downside risks to our forecasts include higher-than-expected impairment charges.