DBS GROUP HOLDINGS LTD
D05.SI
DBS - Going Digital To The Core
- We attended DBS’ Investor Day and are excited about DBS’ digital implementation. Besides working to pre-empt disruptors in Singapore and Hong Kong, DBS launched new digital distribution models in India and Indonesia – with these two growth markets likely to record 20% CAGR income growth in the future. The cloud architecture implementation should help DBS keep costs low.
- We raise our net profit forecasts primarily on lower cost expectations, while our TP rises to SGD23.33 (from SGD21.45, 3% downside) on a more optimistic long-term ROE assumption.
To create shareholder value from digitalisation, DBS is working on three prongs:
- For consumer and small and medium enterprises (SMEs) (in Singapore and Hong Kong), the agenda is to pre-empt disruptors, by rapidly transforming to digital models. DBS will build on its No. 1 position in Singapore in mortgages, auto loans, credit cards and bancassurance. It expects income CAGR of 11% (2015-2017, based on 1H17 numbers), with potential for 50% of the bank’s income in five years’ time (44% currently);
- For consumer and SMEs (growth markets), the agenda is to disrupt incumbents. DBS has successfully launched new distribution models in India and Indonesia. Income growth would likely exceed 20% CAGR. Sees potential for this space to contribute 10% of income, from 4% currently;
- For other businesses, the agenda is to digitalise for profitability. DBS guided for cost reduction of SGD100m between 2015 and 2017, and aspirational ROE of ~10%.
DBS is working on cloud architecture.
- This digital architecture makes it inexpensive to scale the platform software, and hardware is also inexpensive as there are many suppliers. From 90% traditional architecture in 2014 (balance to cloud), DBS is targeting for 93% cloud architecture by 2019. This would help in cost savings.
Digital yields stronger financial ratios.
- DBS shared that its measurement methodology indicated that digital models recorded income growth of 23% CAGR, vs traditional models’ 2% contraction CAGR. ROE for digital of 27% is also higher than traditional’s 19%. Digital model CIR of 34% is also sharply lower than traditional’s 55%. As such, DBS is progressively helping customers to adopt digital behaviours.
- Following the inputs, we cut our forecast of DBS operating expenses, and consequently raised both 2018 and 2019 net profit forecasts by 2%.
- We are also more optimistic on the long-term ROE for DBS, and raised it to 11.1% (from 10.6%) – this contributed to our higher TP of SGD23.33. However, we maintain NEUTRAL, as the positives have largely been priced in.
Leng Seng Choon CFA
RHB Invest
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http://www.rhbinvest.com.sg/
2017-11-20
RHB Invest
SGX Stock
Analyst Report
23.33
Up
21.450
