DBS Group - UOB Kay Hian 2021-04-05: Proxy To The Inevitable Rise Of Government Bond Yields; Upgrade To BUY


DBS Group - Proxy To The Inevitable Rise Of Government Bond Yields; Upgrade To BUY

  • Recovery from the COVID-19 pandemic is getting entrenched with a series of fiscal stimulus lined up to pump-prime the US economy. Government bond yields are expected to remain firm with an upward bias.
  • We raise our DBS's 2021 earnings forecast by 10% after adjusting credit costs lower from 40bp to 31bp as asset quality improves.
  • The second wave of COVID-19 infections in India has limited impact on DBS as India accounted for only 1.5% of DBS’s total loans.
  • Upgrade DBS to BUY. Target price: S$32.95.

Economic recovery gathers momentum.

  • Besides the rapid rollout of COVID-19 vaccinations and the recent US$1.9t American Rescue Plan, the US economy will benefit from the Biden Administration’s upcoming US$2.3t infrastructure plan. The economic recovery has progressively become more entrenched. The series of sustained fiscal stimulus will keep economic growth buoyant and strong, which ensures that government bond yields stay firm with an upward bias.

Pursuing growth from sustainable finance.

  • DBS (SGX:D05)'s management has guided for mid single-digit loan growth for 2021. Loan growth will be supported by renewable, clean-energy and green projects, whereby DBS has committed to provide financing of S$50b by 2024, more than twice its previous target of S$20b.
  • DBS closed S$9.6b in sustainable financing transactions in 2020, an increase of 81%. It is the lead coordinator and arranger in consortium of 9 banks for PT Halmahera Persada Lygend’s US$625m project financing to build Indonesia’s first High Pressure Acid Leach (HPAL) smelter, which manufactures raw materials for the production of electric batteries for electric vehicles.

Exposure to loans under moratorium significantly reduced.

  • DBS’s loans under moratorium have contracted significantly by 70%. Loans under moratoriums have dwindled from 4.3% to 1.3% of total loans due to the expiry of moratorium (many borrowers did not seek extension).
    • In Singapore, loans under moratorium declined by 88% for residential mortgages and 76% for SME loans.
    • In Hong Kong, loans under moratorium for large corporates and SMEs declined 52%.
  • Delinquencies were low for borrowers exiting the moratorium in Singapore and Hong Kong.

Credit costs expected to be much lower in 2021.

  • Asset quality is likely to improve due to the ongoing economic recovery. DBS's management guided for total provisions of about S$4b cumulatively for two years in 2020 and 2021, near the mid-point of its previously guided range of S$3b-5b.
  • DBS has fortified its balance sheet by recognising provisions of S$3b upfront in 2020. Thus, provisions are expected to be much lower at S$800m-1,000m in 2021.

DBS India is locally incorporated.

  • DBS India plans to be a full-service bank in India. Lakshmi Vilas Bank (LVB) will help DBS India grow its secured SME, secured retail and wealth management businesses. LVB has 563 branches and 974 ATMs, of which 88% are in South India. It has 2m retail and 125,000 SME customers. The amalgamation enables DBI to scale up in South India, which has longstanding and close business ties with Singapore. DBI was previously predominantly wholesale funded. LVB allows DBI to tap on deposits from retail and SME customers.

Limited impact from second wave of COVID-19 infections in India.

  • DBS has injected Rs2,500 crore (S$463m) into DBI. DBS India has CET-1 CAR of 12% post-amalgamation of LVB as of end-20. It has set aside general provisions equivalent to 9.5% of LVB’s performing loans.
  • India is currently weathering an intense second wave of COVID-19 infections, which puts strain on the financial system. The repercussion from the resurgence of COVID-19 infections is limited as India accounted for only 1.5% of DBS’s total loans post-amalgamation of DBI and LVB.

Integration of LVB underway.

  • DBS has assigned a dedicated team of 150 employees across various functions to drive the integration of LVB. The interim organisation is based at LVB’s headquarters in Chennai, comprising senior management and staff from various business units and support functions. It has identified a team of change champions to be trained as culture ambassadors, who will facilitate the alignment of corporate culture.

Not uncommon for shareholders to be wiped out during resolution of insolvent banks.

  • DBS's management explained that the primary defendant of the lawsuit from LVB’s shareholders and bondholders is the Reserve Bank of India (RBI), which approved and completed the scheme of amalgamation under Section 45 of the Banking Regulation Act on 27 Nov 20. The protection of depositors takes priority over other stakeholders during resolution of insolvent banks. Thus, shareholders are typically wiped out during an amalgamation.

Precedents of rejecting petitions from shareholders.

  • There are three precedents of shareholders being wiped out during amalgamation/merger of banks:
    • amalgamation of Nedungadi Bank and Punjab National Bank in 2003,
    • amalgamation of Global Trust Bank and Oriental Bank of Commerce in 2004, and
    • merger of Ganesh Bank and Federal Bank in 2006. In past lawsuits, the courts have rejected petitions from shareholders and ruled in favour of the transactions.
  • According to management, DBS has made suitable provisions for legal liabilities that may arise during the normal course of business.

DBS - Earnings revision & Recommendation

  • We have raised our DBS's earnings forecast for 2021 by 10% and 2022 by 5% due to lower credit costs as asset quality has improved with sustained economic recovery.
  • Upgrade DBS to BUY. Our target price of S$32.95 is based on 1.48x 2022F P/B, derived from Gordon Growth model (ROE: 10.7%, COE: 7.75%, growth: 1.5%).
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
  • Share price catalyst:
    • Recovery in earnings and DPS due to decline in credit costs in 2021 and 2022.
    • Continued recovery of the Singapore economy accompanied by improvement in business sentiment and easing of safe distancing measures.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-05
SGX Stock Analyst Report BUY UPGRADE HOLD 32.95 UP 30.300