DBS - RHB Invest 2018-09-17: Net Interest Margin Widening Trend Intact


DBS - Net Interest Margin Widening Trend Intact

  • We remain bullish on DBS, with unchanged SGD30.30 Target Price giving 22% upside.
  • We believe the key catalyst for the stock is the US federal funds rate (FFR)’s rising trend widening DBS’ NIM going forward. After the early July property cooling measures, subsequent show-flat visits by potential buyers suggest good demand for upcoming launches as developers lower selling prices – this should support mortgage loan demand.
  • DBS’ capital adequacy ratio (CAR) should also be strengthened by the recent raising of its Additional Tier 1 capital.

NIM to widen.

  • The market expects the US federal funds rate (FFR) to be raised by 25bps during the 25-26 Sep Federal Open Market Committee (FOMC) meeting. Expectations are for further FFR hikes on the growing US economy.
  • Given the historical correlation between the FFR and 3-month SIBOR, we expect further upside in the 3-month SIBOR (from 1.64% now). The 3- month SIBOR averaged 1.51% in 2Q18, and a higher 1.63% for QTD 3Q18 – this rising trend is positive for Singapore banks’ NIM.
  • From DBS’ 2Q18’s NIM of 1.85%, we are forecasting NIM of 1.87% for 2018 (vs management’s guided 1.86-1.87%) and 1.95% for 2019.

~ SGinvestors.io ~ Where SG investors share

Recent positive news flow.

  • In late August, DBS was named the first Singaporean and Asian winner for Global Finance Magazine’s Best Bank in the World Award.
  • In early September, adding to its digital initiatives, DBS unveiled a service that allows wealthy clients to interact with relationship managers on WeChat and WhatsApp.

Impact of property cooling measures may be subdued.

  • After the Singapore Government announced property cooling measures in early July, the market was concerned that Singapore banks’ loan growth may weaken. Recent new property show-flat visits (eg to JadeScape) however, point to continued interest from potential buyers, as indicative prices were lowered by ~10%. We expect mortgage growth to remain steady until end-2019, as drawdown of already-approved loans take effect.
  • Loan growth from 2020 onwards should remain firm if property sales continue to be supported by lower selling prices.

Additional Tier 1 Capital raised.

  • In early September, DBS priced its SGD1bn, 3.98% perpetual capital securities first callable in 2025 to qualify as Additional Tier 1 Capital. Whilst this could marginally slow NIM expansion, it will strengthen DBS’ CAR ratios.

Our long-term ROE assumption is 13.8%

  • Our long-term ROE assumption is 13.8%, premised on gains from DBS’ digital strategy and nationwide digital strategies such as the Monetary Authority of Singapore (MAS)-driven Paynow. Management guided for ROEs of 13-14%, with 14% being achievable if costs are well controlled.
  • Our cost of equity (CoE) assumption is 10.2%, yielding a target P/BV of 1.51x, which is applied to our 2019F BV to derive our SGD30.30 TP. We believe the premium over its 5-year historical average P/BV of 1.2x is justified given the rising NIM trend – this was evident historically.
  • Downside risks include higher impairment charges, and weaker NIMs.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-09-17
SGX Stock Analyst Report BUY Maintain BUY 30.300 Same 30.300