• Less impacted by cooling measures
• DBS deserves a premium
• Fair value of S$32.67

Party Pooper in the Form of Harsh Cooling Measures

Last week, the Singapore authorities unexpectedly announced more property cooling measures. This is reminiscent of the cooling measures introduced in Jan 2013, which led to a 4.5 years decline in residential property prices in Singapore. This round, there is an increase in additional buyer’s stamp duty (ABSD) and the loan-to-value ratio was brought down by 5% across the board.

Will the Impact Last More Than 4.5 Years?

From Jan 2013 to the trough in 2016, the Real Estate index shed 28.4% before staging a recovery starting in early 2017. From early 2017 to October 2017, the index gained 33% - touching a new 5-year high. Unfortunately, with the latest round of cooling measures, the resultant sharp sell-down brought the index down 13.2% YTD. Key real estate developer stocks bore the brunt of the uncertainty and fell sharply. Based on historical trends from 2013, the impact is more severe for property stocks than banking stocks.

Outlook Still Healthy

Based on 1Q18, housing loans accounted for 22% of DBS’s loans book versus 26% for OCBC and 28% for UOB. Together with last Thursday’s (5 Jul 2018) bumper sales of >1000 units during the four hours post the announcement of the cooling measures, we expect this to lessen the impact of slower new loans growth this quarter. However, the longer term potential drop in transaction volumes could impact loans growth.

With the new set of measures, we expect the pace of consumers switching banks for mortgage loans to also come off. The recent regional selldown has brought valuations lower, but we still believe DBS deserves a higher premium than its peers in this region. We have dropped our valuation to 1.7x book (in line with the decline in regional peers from 1.6x to 1.5x), dropping our fair value from S$34.60 to S$32.67. At current price, dividend yield is 4.6%.

Source: OCBC Research - 12 Jul 2018