Resiliency From Its Presence In Developed Markets
- DBS is able to weather any turbulence brought about by the normalisation of US interest rates as developed markets, such as Singapore and Hong Kong, account for 82% of its total income and 65% of total loans.
- Loan growth has decelerated but margins should expand in 2Q15.
- Maintain BUY. Target price: S$25.08.
WHAT’S NEW
- Heading towards mid-single-digit loan growth.
- Management maintained guidance for loan growth at 5-6% for 2015. DBS has clocked loan growth of 1.9% qoq in 1Q15. Loan growth is expected to be lacklustre in the subsequent quarters.
- DBS would benefit from the drawdown of pre-committed corporate loans, which could be lumpy.
- Trade loans have stabilised and did not contract in 2Q15.
- Management expects a drawdown for housing loans of about S$3b for 2015.
- NIM expansion on the cards.
- Management expects net interest margin (NIM) to expand over the next two quarters. DBS should benefit from the re-pricing of corporate and housing loans in 2Q15.
- Excess liquidity of US$ experienced in 1Q15 has diminished as high-cost US$ fixed deposits were allowed to run off.
- The bulk of NIM expansion should occur in 2Q15 but some residual positive impact could occur in 3Q15 as well.
- Asset quality resilient.
- Management does not see any signs of stress in asset quality for its core Singapore and Hong Kong markets.
- DBS did not experience any new NPLs in India and there is adequate provisioning for existing NPLs that were already recognised.
- Management is not worried about its exposure to the oil & gas industry. Thus, total specific provisions are expected to be lower than the 18bp recorded last year.
- Management should consider an increase in dividends.
- DBS’s core earnings have grown at a CAGR of 9.8% over the past five years but dividend per share (DPS) has only increased from 56 to 58 cents per year. The dividend payout ratio has thus declined from 48.7% in 2010 to 37.4% in 2014.
- Management ought to consider an increase in DPS as DBS’s dividend yield of 2.8% trials OCBC’s 3.5% and UOB’s 3.0% (3.2% if we include special dividend) after the recent spectacular rise in share price.
- However, management has adopted a wait-and-see approach due to potential regulatory reform to change the way risk-weighted assets and capital ratios are computed.
- Launching digital banking in India.
- DBS plans to launch digital banking in India in 2H15. The online platform will offer products and services for the mass consumer market.
- Management intends to offer digital banking in Indonesia and China as well at a later stage.
STOCK IMPACT
- Able to weather the impending turbulence.
- DBS would be the most resilient and better able to weather any turbulence brought about by the normalisation of US interest rates.
- Developed markets, such as Singapore and Hong Kong, account for 82% of its total income and 65% of total loans.
- Prime beneficiary of higher interest rates in Singapore.
- UOB Global Economics & Markets Research forecasts 3-month SIBOR to reach 1.30% at end-15 (previous: 1.0%).
- We estimate a 1% increase in interest rates would improve DBS’s NIM by 10bp to 1.78% and improve ROE by 0.6ppt to 11.3%.
EARNINGS REVISION/RISK
- We maintain our existing earnings forecasts.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of S$25.08 is based on P/B of 1.56x, derived from the Gordon Growth Model (ROE: 11.3%, required return: 7.8% and constant growth: 1.5%).
SHARE PRICE CATALYST
- DBS focuses on its nine strategic priorities to grow organically. Growth drivers include regional businesses such as global transaction service, wealth management and SMEs.
- Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan.
(Jonathan Koh, CFA>
Source: http://research.uobkayhian.com/
