DBS Group - Maybank Kim Eng 2015-10-14: Not optimistic

DBS Group - Maybank Kim Eng 2015-10-14: Not optimistic DBS GROUP HOLDINGS LTD D05.SI 

DBS Group - Not optimistic 

  • Our quantitative study validates the market’s perception that DBS’s NIMs will benefit from a rate hike but suggests that DBS may not be the largest beneficiary, as commonly perceived. 
  • Based on regressions from data going back to 2004, we notice that unlike UOB and OCBC, DBS has been shy about passing through higher credit risk. We wonder if this is a reflection of pricing power or pricing strategy. 
  • We have also become more cautious about the banking landscape. We downgrade the sector to Underweight and DBS to SELL with TP SGD15.90

USD exposure a concern 

  • Consensus believes that DBS’s NIMs will expand from higher interest rates, aided by low funding costs from its large CASA deposits (60% of total deposits). Our quantitative analysis validates this; in the scenario of a 50 bps increase in SIBOR and 50 bps wider credit spread, NIMs may expand by 8.7-11.9 bps. but DBS is not the largest beneficiary in this scenario. 
  • We are bewildered about the weak correlation of DBS’s NIMs to credit spreads. The structurally weaker NIMs compared to UOB’s, despite a large pool of cheap deposits, adds to the concern. 
  • While the margin outlook may be stable, the lending landscape is challenging. DBS has the biggest USD exposure among Singapore banks (USD loans comprise ~32% of total loans). It is also most vulnerable to a sharp drop in securities prices. Our recent stress test (Singapore: The Growth Conundrum) concludes that DBS’s may be most severely impacted under our adverse stress test scenario. 

Not optimistic; D/G to SELL 

  • Given the challenging operating environment, we think prices have not bottomed even though stock is now trading at close to -1SD. Downgrade to SELL with SGD15.90, at 1.0x FY15 P/BV, which is close to 1SD below its mean since 2005.

Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-14
Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade HOLD 15.90 Same 15.90