DBS - RHB Invest 2020-12-10: ROE Firmly On Road To Recovery; Keep BUY


DBS - ROE Firmly On Road To Recovery; Keep BUY

  • We believe DBS (SGX:D05) is on its way to a sustained ROE recovery in FY21-22F. Aside from lower credit costs, the pick-up in economic activities will underpin continued improvements in fee income growth and loan demand. Strategies to manage excess liquidity and deposit repricing should also help support NII.
  • The acceleration in digital adoption, spurred by COVID-19, also places DBS ahead of peers. At 1.05x FY21F P/BV against ROE of 9.5%, the current valuation remains compelling.
  • Maintain BUY, new S$30.00 target price from S$25.20, 18% upside with 3.5% FY21F dividend yield.

Provision buffers are high.

  • Compared to peers, DBS has more headroom to absorb any potential losses from credit risks. With provisions of S$2,489m set aside in 9M20, that included adjustments for macroeconomic variables (MEV) and management overlay, management has front-loaded much of its 2-year provision guidance of S$3-5bn. Its LLR was increased to 107% at end-Sep 2020, compared with 94% in Dec 2019.
  • We believe DBS’ provision buffers are sufficient, when put up against the c.5% of loans under relief programmes.

Sustained recovery in fee income.

  • In 3Q20, DBS’ fee income rebounded by a sharp 17% q-o-q to pre-COVID-19 levels. We expect a sustained improvement in fee income from wealth management and customer treasury flows, as economic activities regain pace. Management is optimistic the bank can achieve double-digit fee income growth in FY21.

Managing the low-interest rate environment.

  • Singapore’s short-term interest rates are expected to stay low for longer, dampening prospects of a NIM recovery. DBS expects NIM to ease to 1.4-1.5% (3Q20: 1.53%, FY19: 1.89%). To prop up NIM, the bank is working to manage the excess liquidity built up from robust deposit growth, and reprice deposits lower. Overhead expenses will also be tightly controlled, to improve operating leverage.
  • On a positive note, DBS' management believes loans will grow by a mid-single digit in FY21F, vs the annualised 4.3% growth in 9M20.

Capital position solid, safeguarding dividend prospects.

  • CET-1 is a very comfortable 13.7%, and should safeguard dividend prospects. We project DBS' dividend would rise to S$0.90 in FY21F, from S$0.74 in FY20F.

DBS' target price rises to S$30.00.

  • We make no changes to our earnings forecasts. Our GGM-derived target price for DBS is raised to S$30.00, as we revised the equity risk premium assumption and rolled forward the base year to reflect the higher risk appetite and improving prospects. Our new target price is based on a GGM-based P/BV of 1.25x.
  • See DBS Share PriceDBS Target PriceDBS Analyst ReportsDBS Dividend HistoryDBS AnnouncementsDBS Latest News
  • Key downside risks to our view are:
    1. A sharp resurgence in COVID-19 cases that would once again derail global economic recovery and exert further pressure on asset quality,
    2. a sharper-than-expected deterioration in asset quality post expiry of loan relief programmes, and
    3. weaker-than-expected growth in fee income.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-12-10
SGX Stock Analyst Report BUY MAINTAIN BUY 30.00 UP 25.200