Despite starting the day 1.1% higher, DBS failed to hold its opening gains yesterday as it fell in a single direction to finish 0.4% lower at $17.08. DBS was the biggest laggard among the STI index constituents yesterday, shaving 1.3 index points off the local benchmark.
 
DBS however, is Macquarie Equities Research’s (MER) top pick among local banks, according to a report released on 9 November….
 
Here are some excerpts from the report.
 
MER hosted a 3Q15 post-results lunch with DBS management on 6 November 2015. For key takeaways on the quarterly results, please see DBS - Earnings beat and stable asset quality.
 
Key points and conclusion – (i) DBS management remains confident on its asset quality outlook, (ii) revenue growth in 2016 to be supported by wealth management, bancassurance, cash & custody and non-trade loans, (iii) regulatory uncertainties may lead to Risk Weighted Asset (RWA) inflation for the sector. MER was positively surprised about the very optimistic wording on asset quality by DBS management. DBS remains MER’s top pick among the Singapore banks.
 
Impact
Optimistic asset quality outlook – In MER’s recent research report Fighting the Markets MER said that asset quality trends is their key investment criteria. DBS management expects that specific provisions will go up only ‘by a couple of basis points’ from the current (low) level of approximately 0.2%. This is a strongly positive statement in the current uncertain environment and contrasts with the asset quality ‘accidents’ of peers (such as StanChart).
 
Decent operating outlook – In a nutshell, MER thinks that DBS targets (i) 5% YoY loan growth in 2016 by assuming flattish trade finance loans and 6% growth from non trade finance (refinancing and corporate activity such as M&A) (ii) rather flattish NIMs based on the assumption that SIBOR and US dollar LIBOR will converge when US rates increase (iii) flattish cost income jaws (which may improve over the mid-term due to the digital transformation (iv) a couple of basis points increase in specific loan loss provisions. All of that would suggest mid single-digit, bottom-line growth for 2016, MER thinks.
 
Still regulatory uncertainties for the industry – Regulatory changes may lead to further RWA inflation for the industry. While DBS is much better positioned as the global institutional investment banks, it is still a potential negative. The impact could be “material” and it is a headwind for higher dividend payouts (which MER assumes for the Singapore banks).
 
Earnings and target price revision
Marginal changes.
 
Price catalyst

• 12-month price target: S$20.00 based on a Price to Book methodology.
• Catalyst: asset quality, dividends, growth in non-interest income

 
Action and recommendation
MER has an Outperform rating on DBS – target price S$20.00. DBS remains MER’s top pick among the Singapore banks.
 
MER believes the key reasons to buy DBS are (i) good business momentum in a relative context, (ii) relative beneficiary of higher rates given the strong Singapore dollar liquidity position, (iii) potential to lift dividend payout ratios, and (iv) potential to shift the strategic focus towards cost efficiency if growth opportunities continue to disappear (v) optimistic asset quality outlook by management.
 

Source: Macquarie Research - 18 Nov 2015