• Following the Fed’s emergency rate cut of 50bps this week, our house currently expects a bias for further rate cuts if the viral outlook deteriorates.
• Lowering our estimates and fair value to SGD25.50 which implies 1.3x price/book, in view of further net interest income pressure expected and a more prolonged than previously anticipated viral outbreak situation.
• Capital position of DBS & Singapore banks sector however remain solid, which is supportive of continued dividends payout.

Investment thesis

DBS is Southeast Asia’s largest bank by total assets and a proxy for Asia’s growth and rising middle class via its operations spanning Hong Kong, Greater China and Southeast Asia. We see its earlier focus on technological investments as a key differentiating factor in improving customer experience and acquisition. The bank has moved to quarterly dividends from financial year 2019 to provide shareholders with a more steady income stream and aims to continuously pay sustainable and increasing dividends over time (50% payout ratio). FY20E full year dividend per share is expected at $1.32/share.

Investment summary

Emergency Fed cut of 50bps this week, house expects bias for further cuts - Following the Fed’s recent emergency rate cut of 50bps from the previous range of 1.5%-1.75% to 1%-1.25% range and messaging which suggested the inter-meeting cut is not ―50bps and done‖, our house expects a bias for further rate cuts in its scheduled meetings in March & April. if the viral outlook deteriorates sharply in the coming weeks.

Lower estimates and our fair value to SGD25.50 - With lower net interest margins (NIM) and further net interest income pressure expected amidst a more prolonged Covid19 outbreak situation regionally, we lower our estimates and fair value for DBS to SGD25.50, implying 1.3x price/book (close to its historical average multiple).

DBS is relatively more rate sensitive - Compared to peer UOB, DBS is estimated to have relatively higher interest rate sensitivity given its larger proportion of loans denominated in USD rate related currencies and higher CASA ratio (ratio of deposits in current and savings accounts to total deposits) of 59% vs UOB’s 45%.

Capital position of DBS however remains solid, we expect FY20E dividends to be maintained, barring any major deterioration in asset quality. This implies +5.5% estimated forward dividend yield (FY20E DPS of SGD1.32/share) for the stock based on the last closing price of SGD23.91 (4 March 2020). CET1 ratio was strong at 14.1% as of end FY19.

Recent 2020E guidance – Management expects loan growth and credit costs to be similar to 2019, net interest margins to continue softening ~7bps (based on expectation of a Fed cut this year) and is committed to continue managing costs. Assuming the Covid-19 viral outbreak is managed by summer, revenue impact is estimated broadly at 1-2% and SPs may be raised a few bps.

Hold rating maintained on a softer growth outlook, although dividends should continue to remain supportive, backed by its solid capital position - Share price drivers ahead include changes in the HK/China market’s growth outlook (given DBS’ more meaningful 30% loans exposure to the Greater China region vs sector peer UOB’s ~15% of total loans), asset quality trends, NIMs, dividend policy and COVID-19 developments.

Potential catalysts

As a proxy to Asia’s growth and largest weighted stock on the MSCI Singapore index, DBS is a potential beneficiary of improved risk appetite and global liquidity inflows into Asia equities. Better than expected fee income & wealth management growth and market share gains. Lesser than expected NIMs pressure.

Investment risks

Deceleration in loans and earnings growth, and margin pressure as interest rates decline or macro environment in its key markets (Singapore & HK/China) deteriorate. Worsening in asset quality trends, higher than expected costs pressures & competitive pressures. Regulatory and/or merger & acquisition risks. Longer than expetced economic impact from the Covid-19 outbreak.

Source: OCBC Research - 5 Mar 2020