DBS has fallen approximately 5.4% since the beginning of this year, making it among the worst performing index constituents among the STI index thus far. DBS share price has been sliding the past two months, forming lower highs each time the stock rebounds from a pull back. The stock closed at $19.48 yesterday, up just 1 cent.
 
Macquarie Equities Research (MER) issued a report on DBS with a 12-month target price of $21.00 after the largest bank in Southeast Asia published its 4Q14 results on 10 February 2015. Read on for more excerpts from the report which was published on 25 February 2015.
 
Key points and conclusion – (i) slight miss in earnings and dividend expectations (ii) management sounded optimistic on the business outlook (iii) increasing margins, healthy loan growth and stable asset quality expected.
 
Impact
Earnings summary – In 4Q14 DBS reported a net profit of S$838m (4% YoY, -17% QoQ) which was below MER’s estimate of S$887m and market expectations of S$870m. Relative to MER’s estimates, commission income was lower while costs and provisions came in higher. DBS will pay a full year dividend of S$0.58 (flat YoY) while MER expected S$0.62 (consensus: S$0.60).
 
Volume and margins – Loan growth in 2015 will likely come from non-trade finance loans similar to 2014. Loans grew 11% YoY in 2014 and DBS expects 8% YoY loan growth in 2015. MER expects underlying Net Interest Margins (NIMs) to increase but this is very much dependent on SIBOR and SWAP Offer Rates (SOR) staying at current levels (and on a possible increase in US rates). MER models for a 7bp increase in NIM for 2015.
 
Asset quality and capital – Asset quality remained good but MER believes DBS could be moving up the risk curve, with growth of lower-risk mortgage loans (19% of total loans) and trade finance loans (18% of total loans) slowing down. The Common Equity Tier 1 (CET 1) ratio for DBS remained flat at 11.9% at end-2014 while MER was expecting 12.2%.
 
Earnings and target price revision
Marginal changes to Earnings Per Share (EPS) mainly by assuming higher net interest income and higher costs based on the 45% cost/income ratio target by DBS.
 
Price catalyst

• 12-month price target: S$21.00 based on a Price to Book methodology.
• Catalyst: Trade finance, commodity financing, capital markets, US rates

 
Action and recommendation

• MER has a Neutral rating on DBS – Target Price S$21.00.
• DBS is in good shape; MER likes the investment case but given bullish market topline growth expectations and too much excitement around NIM expansion from higher short-term rates, MER prefers to wait for a cheaper entry opportunity.
• Some revenue growth headwinds from falling commodity prices and little growth in trade finance as well as potentially higher provisions for the China and commodity finance related exposures will make it challenging for DBS to meet the market’s punchy earnings growth expectation for 2015 and beyond, MER believes.

Source: Macquarie Research - 6 Mar 2015