• DBS (SGX:D05) is a beneficiary of the Phase 1 trade deal between the US and China due to its larger exposure to Greater China.
• DBS is a clear leader in digital transformation, having been recognised as the “World’s Best Digital Bank” by Euromoney two times in 2016 and 2018. It is well-positioned to weather challenges from new digital banks.
• Management intends to review DBS’ dividend policy. DBS provides an attractive 2020F dividend yield of 4.6% (best case: 5.1%).

Guidance for 2020F

• Management guided on loan growth of 4%, powered by real estate-related activities and M&As, NIM compression of 7bp (assumes one rate cut from US FED in mid-20) and double-digit growth for fee income for 2020.
• Overall, total income is expected to register low-single-digit growth. Management expects social unrest in Hong Kong to subside in 1H20, followed by a mild recovery in the economy in 2H20. Management guided on credit costs of 20-21bp for 2020F.

Prime Beneficiary of Normalisation in Trade Relations

• DBS is a beneficiary of the Phase 1 trade deal between the US and China as Greater China accounted for 29.9% of total loans and 27.4% of total income in 9M19. Trade loans accounted for a sizeable 11.7% of total loans as of Sep 19.

Leader in Digital Transformation

• DBS was recognised as the “World’s Best Digital Bank” by Euromoney Awards for Excellence two times in 2016 and 2018. DBS launched Digibank in India in Apr 16 and in Indonesia in Aug 17.

Digitally Engaged Wealth Customers Through An Onshore/offshore Model

• Wealth management fees grew 22% y-o-y while AUM expanded 9% y-o-y to S$241b in 3Q19. Having completed the ANZ integration in Feb 18, DBS launched Treasures Private Client (TPC) onshore in four markets - Singapore, Hong Kong Indonesia and Taiwan. It differentiates through iWealth, its all-in-one online platform, which was ranked first globally for having the best client experience for wealth management apps by Cutter Wealth.

Potential Upside From Higher DPS

• Management intends to review DBS’ dividend policy. Our base case DPS for 2020F is S$1.20 (S$0.33 per quarter). Assuming a dividend payout ratio of 55% (payout ratio was 55.9% when DBS last reviewed its dividend policy for 2018), our best case DPS for 2020F would be S$1.32 (S$0.33 per quarter).
• Accumulating DBS at S$21.80 to S$24.00 would provide an attractive dividend yield of 5.5%.

Maintain BUY

• DBS provides an attractive 2020F dividend yield of 4.6%. Our target price is based on 1.56x 2019F P/B, derived from the Gordon Growth model (ROE: 12.2%, COE: 8.0%, Growth: 0.5%).
• DBS Group is one of the UOB Kay Hian's Top Picks for 1H20.

Source: UOB Kay Hian Research - 3 Jan 2020