• Maintain NEUTRAL; SGD25.30 Target Price from SGD28.30, 3% upside, 4.9% yield, based on 1.23x 2020F P/BV.
• Market expectations are for the US Fed to cut the FFR at the mid-September FOMC meeting. Given the historical positive correlation between the US FFR and 3-month SIBOR, we expect further softness in the latter.
• Amongst Singapore banks, DBS (SGX:D05)’s NIM is the most leveraged to changes in the 3-month SIBOR. We forecast its NIM to narrow in the quarters ahead, a negative headwind for its earnings.
• Our Top Pick is UOB (SGX:U11).

Further FFR Cuts to Narrow DBS’ NIM

• Market expectations are for a 25bps cut in the US federal funds rate (FFR) in the mid-September Federal Open Market Committee (FOMC) meeting. The consensus is for a further 25bps cut at the subsequent end-October FOMC meeting. This should translate to further softness in the 3-month SIBOR – current 3-month SIBOR of 1.88% is already 10bps lower than the 2Q19 average of 1.98%.
• During the 2Q19 results briefing, DBS management guided for 3Q19 NIM to be 1bp narrower q-o-q, with a further 1-2bps q-o-q narrowing for 4Q19.
• We forecast DBS 2020 NIM of 1.86%, lower than 2Q19’s 1.91%.

DBS’ High Percentage Loan Exposure to Greater China Not a Positive in the Current Environment

• 29.9% of DBS’ loans are to Greater China, higher than OCBC (SGX:O39)’s 24.2% and UOB’s 15.7%. With the current trade war between US and China adversely affecting China’s economic growth, DBS’ larger percentage exposure is not a positive, as there is a risk of higher NPLs from the economic slowdown.

Scope for CIR to Fall in the Longer Term

• DBS recently said foot traffic in its Singapore branches declined 5% annually over the past few years. It added that it will likely need fewer outlets in the future, although they won’t disappear completely – some branches are needed to maintain branding and last-mile services.
• Digitisation efforts should also contribute to costs being kept under control. However, this positive may not be significant within the next two years.

Dividend Yield to Support Share Price

• We forecast 2019 dividend of SGD1.20/share (4.9% dividend yield) – consistent with DBS’ 2Q19 quarterly interim one-tier tax-exempt dividend of SGD0.30/share.

Our Target Price Is Based on 1.23x 2020F P/BV

Source: RHB Invest Research - 6 Sep 2019