DBS - RHB Invest 2017-11-20: Going Digital To The Core

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.

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%.

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.

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 | http://www.rhbinvest.com.sg/ 2017-11-20

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 23.33 Up 21.450