• We think non-interest income drivers of wealth and treasury income will continue rising towards new normal levels, buffering the impact of flattish NIMs ahead.
• Reiterate ADD on DBS with a higher target price of S$28 as market prices in vaccine optimism.
• We peg our DBS Target Price to a sustainable forward ROE of 11.5%, factoring in a recovery towards pre-pandemic valuations of 1.3x P/BV over FY17-19.

Aggressive Provisioning in FY20F Makes Way for a Better FY21F

• DBS (SGX:D05) has been the most aggressive among peers in setting aside pre-emptive provisions against its guided S$3bn-5bn estimate of credit costs over FY20-21F; the S$2.5bn taken in 9M20 accounted for 50-83% of its guided range – comparably higher than the 43- 57% of peers’.
• DBS maintains a cautionary outlook on asset quality in FY21F as regional moratoriums end amid a still-challenging operating environment, and thus had conservatively loaded up on the said impairments to buffer an eventual winding-down of government aid (in the form of broad-based jobs wage support and extended/targeted sectoral moratoriums, among others).
• That said, the hefty impairments in FY20F consequently imply substantially lower credit costs of 28bp in FY21F (from 79bp in FY20F) and 16% y-o-y earnings recovery.

Sustained Strength in Wealth Management and Treasury Markets

• The gradual easing of domestic social distancing measures and rise of bilateral travel corridors should see through double-digit fee income growth in FY21F. The improvement will likely be broad-based, but wealth in particular will likely remain a key contributor to growth.
• Notably, DBS’s wealth fee income has risen from a quarterly average of S$283m over FY17-19 to S$362m in 3QFY20. Management attributes the recent pick-up to be due to better insurance sales and rising digital leads; we believe DBS’s prior acquisitions of Societe Generale (2014) and ANZ’s (2018) Asian private banking/wealth management franchises were helpful as well.
• We expect further growth of its wealth business as well as sustained treasury income given its steady track record (although this would depend on financial markets) to offset flattish NIMs in FY21F.
• Opex should remain relatively well contained as DBS expects to hold FY21F expenses flattish vs. FY19’s, translating to a CTI ratio of 45% - slightly higher than our expected 42% for FY20F.

Reiterate ADD on DBS With a Higher Target Price Based on Pre-pandemic Valuations

• Clearer repayment trends post-moratoriums of peers’ portfolios lead us to believe that the potential asset quality deterioration may not be as severe as feared. Upside from the hefty impairments taken is an eventual write-back (boosting earnings), although we think this is a longer-term prospect (FY22F onwards).
• We believe incremental newsflow from COVID-19 vaccine developments are confidence boosters for equities, where sectors (such as financials) more geared to a broad economic recovery will be key beneficiaries.
• Reiterate ADD on DBS with higher GGM-based target price of S$28.35, pegged to 11.5% ROE, implying 1.3x FY21F P/BV (average valuation over FY17-19) as vaccine optimism paves the way for an economic recovery.
• Downside risks: sustained border closures.

Source: CGS-CIMB Research - 27 Nov 2020