• Maintain NEUTRAL and SGD35.70 TP, 14% upside with c.6% FY23F yield. At DBS Investor Day 2023 – Digital Transformation 2.0 held earlier this week, management quantified key achievements made since 2017 (when it first shared details on the bank’s digital transformation) and showcased how DBS has deepened its technology capabilities, become data-driven, and is achieving scale and effectiveness. Management sees medium-term ROE at 15-17% and its CET-1 ratio at 12.5-13.5%.

• Medium-term ROE. DBS’ ROE has risen from 11.2% in 2015, when it first embarked on its digital transformation, to 15% in 2022. Of the total 3.8-ppt improvement, 2.5ppts were underpinned by structural drivers while another 2.2-ppt increase was from external drivers (Figure 1). Over the next three years, ROE is expected to range between 15% and 17%, down from the high of 18.6% in 1Q23 – with the drags being NIM (Federal Funds Rate falling below 3%) and credit cost (through the cycle 18bps vs 10-15bps for FY23F). Offsets are expected to come from: i) Faster growth in capital-light high-ROE businesses such as wealth management, global transaction services (GTS), and treasury market sales (TMS); ii) improved profitability in growth markets in India, Taiwan and Indonesia, and iii) capital management (Figure 2).

• Capital management. Management has a CET-1 target range of 12.5-13.5%. This assumes risk-weighted asset growth of 5% pa and dividend payout ratios of 60%. With CET-1 at 14% currently, the bank has the capacity to sustain a SGD0.24 pa increase in DPS, which suggests DPS of SGD1.92 in FY24F. A further SGD3.0bn could be distributed via a further dividend step-up, special dividends or share buybacks.

• Tech capabilities a key differentiator. Management attributes much of DBS’ structural advantage over peers to its technology capabilities. Its application programming interface or API-driven architecture increases connectivity with ecosystem partners, as well as improves internal workflows for greater productivity. The successful consolidation of the bank’s data platform has transformed its data into a competitive differentiator, enabling growth in new markets and segments and effective portfolio risk management. DBS has seen significant ROE uplift in its consumer & SME segments, as well as fee businesses.

• Will comfortably weather a recession. Despite the sharp rise in interest rates, DBS is not seeing stress in any part of its loan book. Internal stress tests indicate that asset quality should remain resilient. The bank has substantial allowances, with a SGD3.8bn general provision buffer (including SGD2.0bn of overlays) and non-performing asset coverage at a comfortable 127%. Capital is robust, with CET-1 at 14% while liquidity is ample.

• Valuations and TP. Our TP of SGD35.70 is based on an intrinsic value of SGD35.00 with a 2% ESG premium applied, based on our in-house ESG methodology. The GGM-derived P/BV of 1.52x is at +2SD from its historical mean, against a multi-year high ROE of c.17%.

Source: RHB Research - 25 May 2023