• We remain bullish on DBS, with unchanged SGD30.30 Target Price giving 22% upside.
• We believe the key catalyst for the stock is the US federal funds rate (FFR)’s rising trend widening DBS’ NIM going forward. After the early July property cooling measures, subsequent show-flat visits by potential buyers suggest good demand for upcoming launches as developers lower selling prices – this should support mortgage loan demand.
• DBS’ capital adequacy ratio (CAR) should also be strengthened by the recent raising of its Additional Tier 1 capital.

NIM to Widen

The market expects the US federal funds rate (FFR) to be raised by 25bps during the 25-26 Sep Federal Open Market Committee (FOMC) meeting. Expectations are for further FFR hikes on the growing US economy.

Given the historical correlation between the FFR and 3-month SIBOR, we expect further upside in the 3-month SIBOR (from 1.64% now). The 3- month SIBOR averaged 1.51% in 2Q18, and a higher 1.63% for QTD 3Q18 – this rising trend is positive for Singapore banks’ NIM.

From DBS’ 2Q18’s NIM of 1.85%, we are forecasting NIM of 1.87% for 2018 (vs management’s guided 1.86-1.87%) and 1.95% for 2019.

Recent Positive News Flow

• In late August, DBS was named the first Singaporean and Asian winner for Global Finance Magazine’s Best Bank in the World Award.
• In early September, adding to its digital initiatives, DBS unveiled a service that allows wealthy clients to interact with relationship managers on WeChat and WhatsApp.

Impact of Property Cooling Measures May be Subdued

After the Singapore Government announced property cooling measures in early July, the market was concerned that Singapore banks’ loan growth may weaken. Recent new property show-flat visits (eg to JadeScape) however, point to continued interest from potential buyers, as indicative prices were lowered by ~10%. We expect mortgage growth to remain steady until end-2019, as drawdown of already-approved loans take effect.

Loan growth from 2020 onwards should remain firm if property sales continue to be supported by lower selling prices.

Additional Tier 1 Capital Raised

In early September, DBS priced its SGD1bn, 3.98% perpetual capital securities first callable in 2025 to qualify as Additional Tier 1 Capital. Whilst this could marginally slow NIM expansion, it will strengthen DBS’ CAR ratios.

Our Long-term ROE Assumption Is 13.8%

Our long-term ROE assumption is 13.8%, premised on gains from DBS’ digital strategy and nationwide digital strategies such as the Monetary Authority of Singapore (MAS)-driven Paynow. Management guided for ROEs of 13-14%, with 14% being achievable if costs are well controlled.

Our cost of equity (CoE) assumption is 10.2%, yielding a target P/BV of 1.51x, which is applied to our 2019F BV to derive our SGD30.30 TP. We believe the premium over its 5-year historical average P/BV of 1.2x is justified given the rising NIM trend – this was evident historically.

Downside risks include higher impairment charges, and weaker NIMs.

Source: RHB Invest Research - 17 Sep 2018