DBS’s share price has steadily recovered from its underperformance in 1Q15, with the price up 2% (outperforming the index by 6%, peers by 2-6%) since end-March. While weaker loan growth represented a concern for some investors, DBS was still able to deliver resilient 1Q15 earnings on strength in non-interest income and benign asset quality. As 2Q15 draws to a close, on our estimates DBS continues to look more attractive than its SG peers. Aside from the expected NIM improvement, its HK operation should benefit from buoyant market activity, and a geographical edge unmatched by peers. Buy.
DBS HK – Strength in market liquidity potentially helping non-interest income…
As highlighted in our 25 March report, ‘Well placed to benefit from recent trends’, HK has been the best return market for DBS, as non-interest income has historically been a bigger contributor for DBS. After recently meeting with some large domestic HK banks, we expect similar strength at DBSHK in 2Q15. Given better stock market turnover, WM/stock brokerages should outperform. In the last bull market in HK (2H07), ~48% of fees were market driven (2H14: 35%). The strength comes at the right time, as domestic growth may remain tepid, while the recent Manulife tie-up should also provide sustainable fees and potentially more upside opportunities for DBS starting 2016.
…as well as keeping asset quality trends intact, funding costs low
The recent market strength in HK should also help sustain a more benign asset quality environment, as property prices remain elevated while liquidity inflow should keep funding costs low. DBSHK’s asset quality has remained intact, and has played a vital role in sustaining low credit costs/profitability for DBS, with NPLs and bad debts accounting for 12% and 15%, respectively, despite a 19% loan book to group in 1Q15. The recent improvement in market liquidity in HK should also help keep its funding costs in check.
Recent trends and catalysts favoring DBS more than peers
DBS remains our top pick among SG banks, given its better risk-reward and upside catalysts vs. peers. Aside from more favorable trends, other upside catalysts include its CASA deposit franchise, benefiting from an eventual pickup in USD rates and more steady FX geographical exposure than peers. (Read Report)
Source : Deutsche Bank Markets Research