DBS Group - OCBC Investment 2020-11-16: More Constructive On 2021


DBS Group - More Constructive On 2021

  • +9% quick DBS share price gains since we reiterated to Buy on 5th November, bringing total returns to +21% since our upgrade of the stock on 6th August 2020.
  • DBS's management remains constructive over the medium term, supported by the bank’s front loading of provisions to date to prepare for potential loans deterioration as moratoriums expire in 2021, while a strong balance sheet continues to position the bank to resume dividends at a later stage when regulators’ guidance is eased.
  • Lifting our estimates and DBS's fair value to S$27, reflecting a more constructive recovery outlook ahead.

DBS's management has a more constructive outlook in 2021

  • In its post results briefing, DBS (SGX:D05)'s management appeared more optimistic on loans growth prospects and believes the bank may overshoot the mid-single digit growth it has guided for 2021. Fee income growth is also expected in the double-digits, which should help to mitigate lower net interest income from low interest rates.
  • Provisions next year should be lower, with some uncertainties remaining in asset quality expectations. While the provisions guidance for S$3-5bn over two years was maintained by DBS, S$2.5bn has already been taken in 9M20 as provisions were front loaded, which positions the bank more comfortably into 2021 for an expected uptick in credit losses as government support schemes expire.

Patience will be needed on the dividends topic

  • DBS announced 3Q dividend of 18 cents per share, similar to 2Q in line with regulatory guidance (FY20 dividends are capped at 60% of FY19 DPS), which brought 9M20 dividend per share to 69 cents/share.
  • We think it is still early to expect clarity from regulators on the dividend front for Singapore banks. DBS pays dividends on a quarterly basis, and its current dividend restriction guided by regulators will be in place until 1Q 2021.
  • DBS's balance sheet remains strong, with CET1 ratio of 13.9% as of end September (vs 13.7% as of June 2020), positioning the bank to improve dividends payout (which management is committed to) when regulators provide the go-ahead at a later stage.

Lifting our estimates and DBS fair value to S$27

  • Lifting our estimates and DBS's fair value to S$27 which implies 1.35x p/b, close to +1 s.d. to its 10Y historical average multiple of 1.2x.
  • While valuations have risen following the recent gains in global equities on optimism over COVID-19 vaccine developments and a more sanguine outlook for global growth next year, we retain our constructive medium term view, based on the expectation for DBS's improved pre-provision operating profits momentum next year, driven by better fee income growth and stabilizing net interest margins, while assuming asset quality should remain under control.
  • Within our forecasts, we have also built in assumptions of S$4.5bn in provisions for DBS over two years, which is pegged at the top end of management’s S$3-5bn range guided over FY20-21E.
  • 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/ 2020-11-16
SGX Stock Analyst Report BUY MAINTAIN BUY 27 UP 24.500