The DBS is the first of the three local banks to report its second quarter earnings tomorrow. DBS has enjoyed a strong month, making returns of 8.3% month-to-date, outperforming STI’s +3% and peer OCBC’s +6.4% (although slightly below UOB’s +9.0%). Technically, the share price is now trading above its 50-day moving average of $16.30 while its 20-day moving average has also turned up.
 
DBS’ first quarter result released in May had exceeded street consensus after it rose for a 11^th consecutive quarter on rising trading income. Net income had advanced 2% year-on-year to $950mn. The Bloomberg consensus for tomorrow’s second quarter earnings is lower at $883mn.
 
Danamon offer to expire tomorrow
DBS, which bid for 99% of Danamon on 2 April 2012 is now facing a choice between settling for a 40% stake allowed under banking rules that Indonesia introduced last July, or rescinding their offer.
 
DBS’s CEO Piyush Gupta had said on 2 May that he is reluctant to buy minority stakes, while CFO Chng Sok Hui said the same day.that the Basel III rule that requires lenders to deduct the value of minority investments from Tier 1 capital make such deals “quite punitive”.
 
The deadline for DBS’ US$6.5bn offer was extended for a second time in May and will expire tomorrow. Danamon shares have plunged 23% from the 6,450 rupiah-high reached after DBS’s offer was made.
 
Macquarie Equities Research’s view on DBS
In a report published on 3 June, MER stated that they had no outperforms in the Singapore banking sector. Nevertheless, for investors who wish to retain exposure, they would focus on DBS given the bank’s recent operating record of value creation.
 
The change to MER’s view here is that in recent days they have become increasingly confident that DBS will not agree to purchase an associate stake in Danamon.. MER now thinks the bank will either do the full deal or walk away, which is the right course of action in their view.

Source: Macquarie Research - 31 Jul 2013