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Inexpensive valuations and strong earnings to drive performance
DBS is our top pick among the Singapore banks, as we believe it will show the strongest earnings growth in 2016, is inexpensive, and is the prime beneficiary of higher interest rates. While we expect its NPLs to rise in 2016, we believe the increase will not be significant, and this should install confidence about its risk management.
Concerns over asset quality should abate in 2016
We believe the market has been overly concerned about its China and commodity exposure, but the results YTD show that these concerns are unfounded. The increases in the NPLs and the credit cost have not been significant and our conversations with the management suggest that this is unlikely to change in 2016. We believe 2016 could see the formation of new NPLs peak and this could act as a catalyst for the stock.
Slower loan growth but better NIMs
We expect its loan growth to moderate to 5% in 2016 but earnings could grow by 14% y-y, courtesy of higher interest rates. We expect local interest rates to increase in 2016 because of currency depreciation and tight liquidity conditions. This should benefit DBS because close to 80% of its Singapore dollar loans are pegged to floating rates, while only 10% of its local deposits are linked to market rates.
Valuation: Our TP implies a 12-month forward P/book of 1.35x
We revise down our 2016 and 2017 EPS estimates by 5% and 7%, on the back of slower loan growth. Our target price of SGD 22.60 is based on the Gordon Growth Model with the key assumptions being a COE of 9.5% and ROE of 11.8%. Buy. (Read Report)
Source : Nomura Global Markets Research