• 16% YTD gain
• Outlook is still favourable
• Upping fair value to S$32.53

The Rise of a Banking Giant…

Since we raised our fair value estimate on 1 Feb 2018, the stock has moved up from S$26.61 (on 1 Feb) to as high as S$29.63 (on 26 Feb 2018), a gain of 13.4% in less than a month. DBS has consistently stayed as our top pick in the banking sector and it has recorded a stellar gain of 15.9% year-to-date. In comparison, the Straits Times Index (STI) gained 3.3% during the same period, making DBS a clear outperformer in the Singapore market so far this year.

In addition, it is also currently the largest market capitalization stock on the Singapore Exchange with a market capitalization of S$73.8 billion. As an indication, the Singapore market’s total capitalization is currently at around US$575.2 billion, which means DBS currently accounts for about 10% of the market’s total capitalization.

2018 Is Likely to be Another Good Year

DBS recently posted a good set of FY17 results, led by several business units including wealth management and higher product sales. Management is also upbeat about the outlook for 2018. As a recap, we believe that the current renewed interest in the Singapore residential property market should also be positive for its mortgage business.

Earlier, management has guided for loans growth of 7-8% and for margin improvement due to a more favorable interest rate environment for banks. It is expecting to maintain its cost-income ratio at 43%. Dividend payout will go up to S$1.20 in 2018.

Raising Fair Value Estimate to S$32.53

With the US Federal Reserve Chairman Jerome Powell’s latest comment, most economists are now expecting four Fed hikes in 2018. Based on the latest International Monetary Fund’s projection (Jan 2018), forecast for global growth is estimated at 3.7% in 2017, with the momentum continuing into 2018 at 3.9% and 2019 at 3.9% as well.

We believe this will be a positive setting for Singapore’s banking sector. With the re-rating of Asian banks, which are now trading at 1.6x book, we believe that DBS deserves to trade at the same or higher valuation. We have raised our valuation to 1.7x book, bringing our fair value estimate from S$29.50 to S$32.53.

Source: OCBC Research - 5 Mar 2018