• Stay NEUTRAL; DBS Target Price with 1% downside, 5% yield, on 1.28x 2020F P/BV.
• 4Q19 weakness in the SIBOR and Singapore Swap Offer Rate is likely to lead to a sequentially narrower 4Q NIM.
• Market expectations: 1H20 US federal funds rate (FFR) to be relatively stable. However, the lagged effects of past FFR cuts should still narrow DBS GROUP (SGX:D05)’ 2020 NIM.
• Amongst Singapore banks, DBS’ NIM is the most leveraged to changes in the 3-month SIBOR. We forecast NIMs to narrow in the quarters ahead – a negative headwind for earnings.

Softer 3-month SIBOR in 4Q19 to Narrow NIM

• The 3-month SIBOR averaged 1.80% in 4Q19 (3Q19: 1.92%). This will contribute to softer lending yields and sequentially narrower NIMs.
• During 3Q19’s results release, management guided for 2019 NIM of 1.88% vs 3Q19’s 1.90% (our expectation too) and 2020 NIM to be 7bps narrower y-o-y.

Expect Marginal Sequential 4Q19 Loan Growth

• DBS had strong home mortgage bookings for primary market transactions in 2Q19 and 3Q19, and some of these could have translated into a sequential rise in 4Q19 home mortgages. Trade and non-trade loans are likely to have expanded sequentially during this period too.
• We forecast DBS’ 2019 loan growth at 3.3%. Management’s guidance is for 2020 loan growth to be similar to 2019’s.

DBS’ Has High Percentage Loan Exposure to Greater China

• DBS’ has high percentage loan exposure to Greater China, but its focus on lending to Hong Kong corporates investing outside the latter is an offsetting factor. 30% of the bank’s loans are to Greater China. This is higher than OCBC (SGX:O39)(NEUTRAL, Target Price: SGD11.50) and UOB (SGX:U11)’s (BUY, Target Price: SGD29.50) 25% and 16%.
• The current developments in Hong Kong are negative for banks with operations there – but DBS is probably insulated. This is because DBS Hong Kong (DBS HK) lends to the larger corporates that mainly use the funding for overseas operations, eg investing in ASEAN. Consequently, DBS HK’s asset quality is less correlated with Hong Kong’s economic growth.

Dividend Yield to Support Share Price

• We forecast a 2019 dividend of SGD1.20/share (4.6% yield) – consistent with DBS’ 3Q19 quarterly interim one-tier tax-exempt dividend of 30 cents/share.

Our Target Price Is Based on 1.28x 2020F P/BV

• Our valuation on DBS is based on a long-term ROE assumption of 13.3% vs 9M19’s 13.6% – the reduction is attributed to weaker NIMs and increased future competition from digital banks. This yields a 2020F target P/BV of 1.28x, which is close to the 7-year historical average of 1.21x. From this we derive our DBS Target Price.

Source: RHB Invest Research - 14 Jan 2020