DBS Group Holdings - Resiliency From Its Presence In Developed Markets

DBS is able to weather any turbulence brought about by the normalisation of US interest rates as developed markets, such as Singapore and Hong Kong, account for 82% of its total income and 65% of total loans. Loan growth has decelerated but margins should expand in 2Q15. 

Maintain BUY. Target price: S$25.08.

WHAT’S NEW
Heading towards mid-single-digit loan growth. Management maintained guidance for loan growth at 5-6% for 2015. DBS has clocked loan growth of 1.9% qoq in 1Q15. Loan growth is expected to be lacklustre in the subsequent quarters. DBS would benefit from the drawdown of pre-committed corporate loans, which could be lumpy. Trade loans have stabilised and did not contract in 2Q15. Management expects a drawdown for housing loans of about S$3b for 2015.

NIM expansion on the cards. Management expects net interest margin (NIM) to expand over the next two quarters. DBS should benefit from the re-pricing of corporate and housing loans in 2Q15. Excess liquidity of US$ experienced in 1Q15 has diminished as high-cost US$ fixed deposits were allowed to run off. The bulk of NIM expansion should occur in 2Q15 but some residual positive impact could occur in 3Q15 as well.

Asset quality resilient. Management does not see any signs of stress in asset quality for its core Singapore and Hong Kong markets. DBS did not experience any new NPLs in India and there is adequate provisioning for existing NPLs that were already recognised. Management is not worried about its exposure to the oil & gas industry. Thus, total specific provisions are expected to be lower than the 18bp recorded last year.

Management should consider an increase in dividends. DBS’s core earnings have grown at a CAGR of 9.8% over the past five years but dividend per share (DPS) has only increased from 56 to 58 cents per year. The dividend payout ratio has thus declined from 48.7% in 2010 to 37.4% in 2014. Management ought to consider an increase in DPS as DBS’s dividend yield of 2.8% trials OCBC’s 3.5% and UOB’s 3.0% (3.2% if we include special dividend) after the recent spectacular rise in share price. However, management has adopted a wait-and-see approach due to potential regulatory reform to change the way risk-weighted assets and capital ratios are computed.

Launching digital banking in India. DBS plans to launch digital banking in India in 2H15. The online platform will offer products and services for the mass consumer market. Management intends to offer digital banking in Indonesia and China as well at a later stage.

STOCK IMPACT
Able to weather the impending turbulence. DBS would be the most resilient and better able to weather any turbulence brought about by the normalisation of US interest rates. Developed markets, such as Singapore and Hong Kong, account for 82% of its total income and 65% of total loans.

Prime beneficiary of higher interest rates in Singapore. UOB Global Economics & Markets Research forecasts 3-month SIBOR to reach 1.30% at end-15 (previous: 1.0%). We estimate a 1% increase in interest rates would improve DBS’s NIM by 10bp to 1.78% and improve ROE by 0.6ppt to 11.3%.

EARNINGS REVISION/RISK
We maintain our existing earnings forecasts.


Technical Analysis
Daily Chart
VALUATION/RECOMMENDATION
Maintain BUY. Our target price of S$25.08 is based on P/B of 1.56x, derived from the Gordon Growth Model (ROE: 11.3%, required return: 7.8% and constant growth: 1.5%).

SHARE PRICE CATALYST
DBS focuses on its nine strategic priorities to grow organically. Growth drivers include regional businesses such as global transaction service, wealth management and SMEs.

■ Growth from overseas markets, such as China, Hong Kong, India, Indonesia and Taiwan. (Read Report)

Source : UOB Kay Hian Research

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