Structural Changes Finally Starting to Show

• DBS GROUP HOLDINGS LTD (SGX:D05) has had several false starts on margin improvements in the past. Not this time.
• FY18E adjusted NIMs likely expanded 15bps y-o-y with rising interest rates. Supported by a cheap deposit base, margins could have further upside, in our view.
• Post-GFC, DBS’ return to its commercial-banking roots with a focus on sustainable interest and fee income over volatile trading gains has improved its earnings visibility. Exposure to North Asia may be an overhang amid the current trade war but solid counterparties and a strong, liquid balance sheet should help to offset some of these risks.
• With improving ROEs and high dividend yields, we initiate with BUY and a DDM Target Price of SGD30.18.

Margin Winner

• Over 60% of DBS’ deposits are low cost CASA; the highest in the sector. The Group’s reach into the Singaporean heartlands through their POSB franchise has enabled them to command 52-53% savings deposit market share. As a result, with the continued rise in policy rates, we believe DBS should be able to drive spreads wider allowing NIMs to expand.
• We estimate NIMs to be 8bp y-o-y higher in 2019E.

Better Earnings Visibility

• Interest income now generates nearly 70% of total income compared to 60% in 2010. DBS has strategically shifted focus towards commercial banking vs. aspirations to be a universal bank pre-GFC. Fee income as a proportion of non-interest income has increased from 51% in 2010 to 68% in 2018E, replacing volatile trading income. This is primarily from investments in wealth management, bancassurance etc kick in. This has improved overall earnings quality and visibility.

Structural ROE Improvement, Affordable Valuations

• ROEs have already expanded 200bp in the past 2-years. With the support of widening spreads, positive loan momentum and better cost management, ROEs should continue to widen in the medium term.
• Our multi-stage DDM (COE 10.3%, 3% terminal) Target Price offers 25% upside. With PB below historical mean, initiate with BUY.

Source: Maybank Kim Eng Research - 30 Jan 2019