DBS Group - OCBC Investment 2020-03-05: More Rates Pressure


DBS Group - More Rates Pressure

  • Following the Fed’s emergency rate cut of 50bps this week, our house currently expects a bias for further rate cuts if the viral outlook deteriorates.
  • Lowering our estimates and fair value of DBS (SGX:D05) to SGD25.50 which implies 1.3x price/book, in view of further net interest income pressure expected and a more prolonged than previously anticipated viral outbreak situation.
  • Capital position of DBS & Singapore banks sector however remain solid, which is supportive of continued dividends payout.

Emergency Fed cut of 50bps this week, house expects bias for further cuts

  • Following the Fed’s recent emergency rate cut of 50bps from the previous range of 1.5%-1.75% to 1%-1.25% range and messaging which suggested the inter-meeting cut is not ―50bps and done‖, our house expects a bias for further rate cuts in its scheduled meetings in March & April. if the viral outlook deteriorates sharply in the coming weeks.

DBS is relatively more rate sensitive

  • Compared to peer UOB (SGX:U11), DBS (SGX:D05) is estimated to have relatively higher interest rate sensitivity given its larger proportion of loans denominated in USD rate-related currencies and higher CASA ratio (ratio of deposits in current and savings accounts to total deposits) of 59% vs UOB’s 45%.
  • Capital position of DBS however remains solid, we expect FY20E dividends to be maintained, barring any major deterioration in asset quality. This implies +5.5% estimated forward dividend yield (FY20E DPS of SGD1.32/share) for the stock based on the last closing price of SGD23.91 (4 March 2020). CET1 ratio was strong at 14.1% as of end FY19.

Recent 2020E guidance

  • Management expects loan growth and credit costs to be similar to 2019, net interest margins to continue softening ~7bps (based on expectation of a Fed cut this year) and is committed to continue managing costs. Assuming the Covid-19 viral outbreak is managed by summer, revenue impact is estimated broadly at 1-2% and SPs may be raised a few bps.

Lower estimates and our fair value to SGD25.50

  • With lower net interest margins (NIM) and further net interest income pressure expected amidst a more prolonged Covid19 outbreak situation regionally, we lower our estimates and fair value for DBS to SGD25.50, implying 1.3x price/book (close to its historical average multiple).
  • HOLD rating maintained on a softer growth outlook, although dividends should continue to remain supportive, backed by its solid capital position.
  • Share price drivers ahead include changes in the HK/China market’s growth outlook (given DBS’ more meaningful 30% loans exposure to the Greater China region vs sector peer UOB’s ~15% of total loans), asset quality trends, NIMs, dividend policy and COVID-19 developments.
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-03-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 25.5 DOWN 27.500