Excerpts from analyst's report
Daiwa Capital Markets analyst: David Lum, CFA
 More than one in three leaders at DBS are women. Photo: DBSInitiation: best positioned to monetise rising rates Investment case: We initiate coverage on DBS with a Buy (1) rating. DBS is our top pick in the sector as its net-interest income is the most leveraged to rising interest rates (SIBOR and SOR) in Singapore. DBS has 53% of SGD savings deposits (as at 30 June 2015), and over 91% of its SGD deposits are CASA accounts. We expect DBS to enjoy a 37bps pickup in its NIM over 2015-17 compared to 17bps for OCBC and 22bps for UOB. We are forecasting industry-leading EPS growth for it each year for 2015-17 and a 3-year EPS CAGR of 12.1%. |
DBS derived 6% of its 1H15 pre-tax profit from greater China (excluding Hong Kong), and the profile of DBS’s borrowers (large SOEs and firms with regional and cross-border requirements) is different from a typical China bank. To be conservative, we assume that the NPL ratio for the greater China segment would rise from 0.7% (as at end-June 2015) to 1.8% by end-2017.
We are not overly concerned with its HK banking operations (24% of pre-tax profit for 1H15) aside from the expected slowdown in the local economy. We estimate that all Asia economies are likely to face headwinds in 2015-16, but DBS’s 1H15 net profit contribution from South and Southeast Asia was less than 1% for 1H15. We believe DBS’s positive corporate and brand transformation under CEO Piyush Gupta probably has a few more years to go. Under his leadership (since late 2009), the quality of its earnings has improved.
 "Catalysts: The major share-price catalyst for DBS would be rising interest rate expectations. Its key rates would be SIBOR and SOR, which tends to rise above SIBOR if the forex market expects the SGD to weaken vs. the USD. "In addition to rising interest rates and the upward trajectory of NIMs, other positive catalysts for the stock could be positive and discernible gains from business initiatives implemented earlier, such as recurrent income coming strongly through the P&L from the Manulife bancassurance distribution agreement." -- David Lum, CFA (photo) |
Valuation: DBS trades at a discount to its 10-year mean forward PBR of 1.2x and PER of 11.5x. More importantly, DBS offers the most upside to our 12-month target price of SGD23.60, derived from the warranted equity method.
The major driver for this valuation approach is the improvement in ROE by 2017E from the cyclical recovery in interest rates and structural.
Risks: The major risks to our Buy (1) call would be a further deterioration to the global or US economic outlook, which could postpone the long-awaited Fed rate hike. Another negative risk would be worse-than-expected stress in its Singapore loan book if the Singapore economy slips into a severe recession in coming quarters.
