DBS - RHB Invest 2016-11-23: More Certainty On Fed Funds Rate Hike a Boon

DBS - RHB Invest 2016-11-23: More Certainty On Fed Funds Rate Hike a Boon DBS GROUP HOLDINGS LTD D05.SI

DBS - More Certainty On Fed Funds Rate Hike a Boon

  • Despite DBS’ 10% share price rise MTD, the positives from expected higher Singapore interest rates have not been fully priced in. 
  • Since the US Presidential Elections, the Singapore 10-year government bond yield has jumped ~40bps to 2.297%. We expect SIBOR, which rose at a more subdued pace, to increase more sharply going forward. 
  • DBS’ earnings would rise most (vs peers) from every bp rise in SIBOR, and therefore remains our Top Pick. 
  • We raise our TP to SGD18.38 (from SGD17.30, 11% upside) as we increase our long-term ROE assumption.

DBS’ earnings would gain the most from any SIBOR rise. 

  • Our sensitivity analysis shows that, in a steady state, a 10bps rise in SIBOR could raise DBS, OCBC’s (OCBC SP, NEUTRAL, TP: SGD8.81) and UOB’s (UOB SP, NEUTRAL, TP: SGD18.90) 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 Elections, sovereign yields have surged. The US 10-year Treasury yield is now 2.313%, from 1.826% at end-Oct 2016. 
  • Similarly, the Singapore 10-year government bond yield has also jumped – to 2.297%, from 1.887% at end-Oct 2016.

SIBOR uptrend has begun. 

  • Market expectations are for the Fed Funds rate to be raised in December, and more increases are expected in 2017. Given the positive correlation between the US Fed Runds rate and Singapore Interbank Offered Rate (SIBOR), we believe SIBOR would be on an uptrend. The 3- month SIBOR has already risen to 0.92%, 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 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 2016 (excluding Swiber). We forecast 2017 credit cost of > 40bps, higher than 9M16’s 32bps ie our earnings forecasts are conservative.

Increased certainty of Fed Funds rate hike has led to raising of TP. 

  • Whilst we have kept our earnings forecasts, the probability of a Fed Funds rate hike has risen sharply, and some market players also see a higher likelihood of more Fed Funds rate increases going forward. We believe these could catalyse DBS’ share price to rise further, building on its total return of 10% MTD.
  • Maintain BUY, raising our GGM-derived TP to SGD18.38, factoring in CoE of 10.1% (lowered from 10.4% as beta has decreased) and ROE of 10.2% (previously 10%).
  • Downside risks to our forecasts include higher-than-expected impairment charges.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-23
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 18.38 Up 17.300