• Re-rating of banks
• Well positioned to enjoy growth
• Raising fair value to S$29.50

Re-rating of Banking Stocks

DBS recently touched a new historical high of S$27.40 on 25 Jan 2018, up 51% from the 52- week low of S$18.12 in Feb 2017. The bulk of the price gains came about in the last three months when the re-rating of Asian banks lifted banks’ valuations from the trough in 2016. Prior to this, Singapore banks were trading as low as <1x historical book in 2016 as investors were concerned about Singapore banks’ exposure to the oil and gas sector and the required write-offs and the potential hit on income statements and balance sheets. With the stable outlook for the region and the pick-up in equities, Singapore banks are now trading at 1.4x historical book, slightly below Asian banks’ average of 1.6x book.

DBS Is Poised to Benefit

With healthy economic growth in the Asia Pacific region, we expect DBS to be in a good position to enjoy another year of broad-based fee income growth. Its wealth business is likely to enjoy another good year with an increase in AUM and earnings. We also expect treasury income to pick up in 2018. Geographically, we expect both Singapore and Hong Kong to do well in 2018. The pick-up in property transactions should also result in better income. In addition, the positive spillover effect from the gains in equity markets into the first month of 2018 is also a good indicator. For the longer term, we expect its digitalization push to put it in a good position to grow as more clients embrace digital banking services.

Raising Fair Value Estimate to S$29.50

After last year’s stellar share gains of between 30%-43% (average of 37%) for the three banks, the momentum appears to be healthy this year. We expect DBS to post a good set of 4Q17 results on 8 Feb 2018. We expect broad-based growth in 2018, and are projecting earnings growth of 24.9% in FY18 and 10.1% for FY19. With the recent re-rating, we have also raised our valuation peg to 1.45x FY18 book. This increases our fair value estimate from S$27.40 to S$29.50.

Source: OCBC Research - 1 Feb 2018