• Re-rating of banking stocks
• Downgrade to HOLD; FV S$17.83
• Buy at S$16.80 or lower

Outperformance in last quarter

After languishing for the large part of 2016, the local banking sector piled on strong gains following Trump’s election win in early November. Based on the FTSE Financial Index (FSTFN), the index jumped from a low of 740.84 (on 9 Nov 2016) to a recent high of 809.28 (8 Dec 2016), up about 9.2% in one month. This spectacular gain was similarly seen for DBS. Its stock price surged from the low of S$14.97 to as high as S$18.40 for the same period, up some 23%. Since then, the gains have come off and the stock is currently trading at around S$17.44, down 5.2% from recent high.

Optimism due to higher rates ahead

Understandably, Trump’s perceived pro-business view and expected focus on investment and infrastructure have a positive effect on corporate earnings expectations for 2017. This together with expectation of higher interest rates in 2017 are just some of the factors that led to the optimism and re-rating for the banking sector in some regional markets, Europe and the US. In Singapore, the average price-to-book (PB) ratio moved up from 0.95x in Oct to 1.05x by Dec.

Banking sector not completely out of the woods

While the global outlook is showing some signs of improvement, the underlying softness for the Singapore economy and selective sectors (including oil and gas and property) remain. We are retaining our profit projections as we were previously ahead of consensus and in the last two months, earnings revisions have brought consensus up close to our estimates. For DBS, the 5-year average PB ratio is around 1.15 but with a still mixed outlook for the region, we think that for the near term, the stock will continue to trade at a discount to this level, likely within the 0.95x-1.05x PB band (translating to fair value estimates of S$16.94 to S$18.72). With the recent re-rating of banking stocks, we have moved our valuation peg to 1x book, resulting in a fair value estimate of S$17.83. At current level, we are downgrading the stock to a HOLD and think a better level to re-enter the stock will be at S$16.80 or lower.

Source: OCBC Research - 3 Jan 2017