DBS - RHB Invest 2018-06-29: Golden Opportunity On Rising NIM

DBS GROUP HOLDINGS LTD SGX: D05

DBS - Golden Opportunity On Rising Net Interest Margin

Upgrade DBS to BUY from Neutral with a new SGD30.30 Target Price from SGD29.60, 14% upside, as we roll over valuation to 2019F book and raise our ROE assumption.
Recent concerns over the US-China trade war has led to DBS’ share price falling 8% over the past one month, more than factoring in its loan exposure to Greater China. At 32%, this is higher than its two peers’ 20% average.
The rising FFR trend remains intact, with market expecting two more rate hikes in 2H18. We forecast continued NIM widening to drive DBS’ earnings.

The US Federal Open Market Committee raised the federal funds rate (FFR) by 25bps to 1.75-2% in mid-June. Market expects another two FFR hikes for the rest of 2018, bringing the expected number of hikes in 2018 to four. More rate hikes going into 2019 are also expected.
Given the historical correlation between the FFR and the 3-month SIBOR, we expect the latter to maintain its upward trend – this should drive DBS’ NIMs wider.
We are forecasting 2018 NIM of 1.85%, with a further widening to 1.90% in 2019 for the bank (1Q18: 1.83%).

Singapore’s peer-to-peer transfer service, PayNow, is expanding its services to include businesses. This new service, which starts on 13 Aug, allows business owners and the Government to link their unique entity numbers to local bank accounts.
We see this government-led initiative contributing to the growing digitalisation of banking transactions, which, in our view, will make banking more efficient in Singapore over the longer term.

We raise our long-term ROE assumption to 13.6% from 12.9% previously on DBS’ digital strategy and synergies from the Monetary Authority of Singapore-led effects, including PayNow. This is consistent with management’s aspirational ROE of ~14% over the longer term. Our cost of equity (CoE) assumption is 10.2% yields a target P/BV of 1.47x, which is higher than the historical average of 1.17x.
We also roll over our valuation to 2019F from 2018F previously, which leads to our upgraded Target Price of SGD30.30 from the prior SGD29.60, 14% upside. Including dividends, the potential total returns are an even higher 18%. Hence, we upgrade DBS to BUY from Neutral.
During the previous FFR upcycle between mid-2003 and mid-2007, the rate rose to > 5% from 1%. For that duration, DBS’ P/BV correspondingly rose as high as 1.9x from 1.04x. Currently, the bank only trades at 1.29x 2019F book and our target P/BV is set at 1.47x.
Downside risks to our forecasts include higher impairment charges and weaker NIMs.

Leng Seng Choon CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-06-29

SGX Stock Analyst Report BUY Upgrade NEUTRAL 30.30 Up 29.600