DBS - RHB Invest 2018-03-15: SIBOR Uptrend To Drive DBS’ NIMs

DBS - RHB Invest 2018-03-15: SIBOR Uptrend To Drive DBS’ NIMs DBS GROUP HOLDINGS LTD D05.SI

DBS - SIBOR Uptrend To Drive DBS’ NIMs

  • Three indicators point to more SIBOR upside – the FFR is expected to rise 3-4x this year, the spread of LIBOR over SIBOR at 73bps is sharply wider than the 47bps historical average and could revert to the mean, and MAS is likely to maintain its current monetary policy in the coming April statement (instead of an appreciating SGD stance). 
  • Our sensitivity analysis suggests that DBS’ net profit would to rise 1.1% for every 10bps climb in SIBOR (more than its peers). 
  • We raise our ROE assumption for DBS and our Target Price to SGD27 (from SGD25, 7% downside). Maintain NEUTRAL.

The federal funds rate (FFR) seen to be hiked 3-4x in 2018. 

  • The market’s expectation is for the FFR to be hiked 3-4x this year. This is a more aggressive stance when compared with the market’s view a few weeks back. 
  • The next Federal Open Market Committee (FOMC) meeting is scheduled for 20-21 Mar and market expectations are for a hike of 25bps.

The London Inter-bank Offered Rate (LIBOR) has risen, and SIBOR is seen to follow suit. 

  • We have examined the spread of the USD’s 3-month LIBOR over the 3-month SIBOR over the past 15 years. The average spread over this period was +47bps. Currently, with the 3-month LIBOR at 2.11% and the 3-month SIBOR at 1.38%, the spread is 73bps. If we assume a reversion to mean, there is scope for the 3-month SIBOR to trend up further. This is despite the 26bps rise in SIBOR since end-Sep 2017. 
  • Note that we avoided using end-Dec 2017 for comparison, as there was a sharp temporary spike just after Christmas that year.

The Monetary Authority of Singapore’s (MAS) April monetary policy statement likely to keep monetary stance unchanged. 

  • Our and market expectations are for the MAS to keep its monetary stance unchanged in the April statement. This means that SIBOR is likely to trend up, in line with the FFR hikes.

DBS’s NIMs on an uptrend. 

  • We are forecasting 2018, 2019 and 2020 NIMs of 1.82%, 1.88% and 1.96% respectively. This is an uptrend vs 2017’s 1.75%. We believe the trend of rising SIBOR would contribute to this uptrend.

DBS’s Target Price has been raised. 

  • Given the likelihood of a more aggressive tightening of US monetary policy, we raised our DBS average ROE assumption over the next few years to 12.7% from 12.1% previously. Our COE assumption remains at 10%. This yields a target FY18F P/BV of 1.39x, higher than the 5- year historical average of 1.15x. Correspondingly, our GGM-derived Target Price is raised to SGD27 (from SGD25, 7% downside). 
  • We note that DBS is going ex-dividend on 3 May (SGD0.60 final and SGD0.50 special dividends), and our SGD27 Target Price is premised on an ex-dividend basis.

Maintain NEUTRAL. 

  • Although DBS is likely to gain from SIBOR increases, we believe the positives have largely been priced in. This is evident from the 50%- plus share price rise over the past 12 months. 
  • Downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs. The converse represents upside risks.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-03-15
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 27 Up 25.000