• Keep NEUTRAL, with a lower GGM-derived Target Price of SGD21.50, from SGD24.80, 2.4% upside with 6% yield, based on 1.09x 2020F P/NBV.
• We lowered our sustainable ROE assumption to 11.2% (from 12.6%), as we cut FY20F earnings on lower NIM and higher provisions assumptions. This follows a recent declaration by WHO on a global pandemic and the sharp fall in crude oil price.
• Given DBS (SGX:D05)’s higher earnings sensitivity (versus peers), at the lower FFR, DBS is the least preferred amongst Singapore banks.

Fed Fund Rate (FFR) Cut Has Led to a Sharp Fall in 3-month SIBOR

• Following the 3 Mar FFR cut of 50bps to the upper bound of 1.25%, the 3- month SIBOR sank to the current 1.35%, versus February’s average of 1.69%. Market believes the FFR will fall even further.
• During the FY19 results briefing in mid-February, DBS management guided for FY20 NIM to be 7bps narrower versus FY19’s 1.89%, on the assumption of one FFR cut in 2020; the circumstances have since changed. We cut FY20F DBS NIM to 1.78%, from 1.81%.

We Expect FY20 Loan Contraction

• 4Q19 amount of loans expanded 4% y-o-y, and was up 1% q-o-q. Given the recent global macro concerns, we now assume FY20 loan contraction of 1%.

Provisions to Move Up

• With COVID-19 being declared a pandemic by WHO and crude oil price tumbling, we believe asset quality will deteriorate. As a result, we raised our FY20F NPL ratio to 1.9% and increased our FY20F provisions by 16% to SGD1.15bn.

We Cut FY20F Net Profit by 5%

• We cut FY20F net profit by 5% to SGD5.51bn, despite our pre-report FY20F net profit being the lowest amongst Bloomberg consensus. DBS management today said that it expects 2% revenue hit for 2020 is a “moving target”, and also that it does not see the situation improving unless business confidence picks up and demand returns. We believe consensus earnings forecasts will trend down over the next few weeks.
• DBS's FY20F yield of 6% may be high, but is unlikely to attract investors in an economically weak environment. We believe there is a risk of DBS not maintaining its 4Q19 dividend of SGD0.33/share.
• Based on our SGD1.23/share dividend for FY20F, DBS's’ yield is 6%, sharply higher than the 10-year Singapore Government Bond yield of 1.19%, and could partly support DBS Share Price.
• Our Target Price is based on 2020F P/NBV of 1.09x, which is lower than the 5-year average of 1.19x. We believe DBS is unlikely to revert to the mean P/NBV in the short term due to the headwinds described above.

Source: RHB Invest Research - 12 Mar 2020