• Stock is up 45% YTD
• Expecting 25% rise in FY18 earnings
• FV of S$27.40; BUY

DBS Outperformed Its Peers

Asian equities have outperformed with the MSCI Asia ex-Japan Index up some 36% for this year. In Singapore, the Straits Times Index (STI) has appreciated 20% this year and this was clearly led by the financial and real estate stocks. The latter has seen active transactions in the enbloc market with close to S$7b worth of sales this year, mainly in 2H17.

The Financial Index is up 31% for this year and this was in large part contributed by DBS, which rose 45% this year. The worst is over for its exposure to the beleaguered oil and gas (O&G) sector and we believe it is entering 2018 on an even stronger footing, especially with the improving sentiment for the Singapore property sector providing another boost in addition to higher interest rates in 2018.

With the recent gains for Asian equities, Asian banks have also outperformed with the gain of 13% YTD (based on the MSCI Asia exJapan Financials Index) versus 4% for the MSCI World Financials Index.

Raising FV to S$27.40

Valuations for banks have moved up in tandem with higher share prices. DBS’s price-to-book is currently at 1.4x, in line with its peers, lower than its Asian peers of 1.5x but higher than the US/European banks of 1.1x. In the past 10 years, DBS has traded between 0.6x book (during the Global Financial Crisis) to as high as 1.53x book. At current level, and taking into account its broad-based earnings growth in 2018, we are projecting a 25% rise in FY18 earnings. We have raised DBS’s FY18 earnings from S$5.44b to S$5.50b. Based on 1.4x book, we are raising our fair value estimate to S$27.40.

Poised for Another Year of Strong Results; BUY

Having provided for its exposure to the oil and gas sector, we have cut allowances from an estimated S$1.8b in FY17 to S$757m in FY18. Together with an 8.2% rise in Net Interest Income and a 5.4% rise in Non-interest Income, we are expecting a 25% rise in net earnings. With an estimated 11.3% upside (including dividend yield of 2.6%), we upgrade the stock to BUY.
 

Source: OCBC Research - 13 Dec 2017