DBS - OCBC Investment 2018-02-01: Our Pick In The Banking Sector

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DBS GROUP HOLDINGS LTD D05.SI

DBS - Our Pick In The Banking Sector

• Re-rating of banks.
• Well positioned to enjoy growth.
• Raising fair value to S$29.50.

Re-rating of banking stocks 

• DBS share price recently touched a new historical high of S$27.40 on 25 Jan 2018, up 51% from the 52-week low of S$18.12 in Feb 2017. 
• The bulk of the price gains came about in the last three months when the re-rating of Asian banks lifted banks’ valuations from the trough in 2016. Prior to this, Singapore banks were trading as low as < 1x historical book in 2016 as investors were concerned about Singapore banks’ exposure to the oil and gas sector and the required write-offs and the potential hit on income statements and balance sheets. 
• With the stable outlook for the region and the pick-up in equities, Singapore banks are now trading at 1.4x historical book, slightly below Asian banks’ average of 1.6x book.

DBS is poised to benefit 

• With healthy economic growth in the Asia Pacific region, we expect DBS to be in a good position to enjoy another year of broad-based fee income growth. Its wealth business is likely to enjoy another good year with an increase in AUM and earnings. 
• We also expect treasury income to pick up in 2018. Geographically, we expect both Singapore and Hong Kong to do well in 2018. The pick-up in property transactions should also result in better income. In addition, the positive spillover effect from the gains in equity markets into the first month of 2018 is also a good indicator. 
• For the longer term, we expect its digitalization push to put it in a good position to grow as more clients embrace digital banking services.

Raising fair value estimate to S$29.50 

• After last year’s stellar share gains of between 30%-43% (average of 37%) for the three banks, the momentum appears to be healthy this year. We expect DBS to post a good set of 4Q17 results on 8 Feb 2018. 
• We expect broad-based growth in 2018, and are projecting earnings growth of 24.9% in FY18 and 10.1% for FY19. 
• With the recent re-rating, we have also raised our valuation peg to 1.45x FY18 book. This increases our fair value estimate from S$27.40 to S$29.50.

Carmen Lee OCBC Investment | http://www.iocbc.com/ 2018-02-01

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 29.50 Up 27.400