Rising Rates, Strong Execution Justifies a Higher PB

• DBS (SGX:D05) marginally missed 2021 earnings. However, we think this is largely a timing mismatch with NIMs not yet reflecting higher interest rates.
• DBS Group’s large, low cost funding base and strong franchise designed to capture regional flows make it a prime beneficiary of rising rates as well as reopening, we believe. We estimate ROEs are set to rise nearly 4ppts above the levels of the past 10-years. This justifies a higher valuation, in our view, especially as risks to dividend payouts are on the upside.

Higher Rates Beneficiary

• DBS's CASA base has increased to 76% of deposits (73% 2020, 59% 2019) giving it a significant low cost funding advantage in a rising rate environment. Even with deposit leakage, Management estimates NII could grow S$18- 20m per bps of US$ rates. A 100bps Fed rate rise could have increased 2021 NII +21%. Current expectations are for 100-175bps of hikes.
• Our Singapore SORA expectations are for +54bps in 2022E. We forecast 2022E NIMs to rise 18bps y-o-y vs 8bps earlier. Conservatively, we expect NIMs to recover to 2019 levels only in 2024E, leaving room for upgrades as the rate cycle becomes clearer.
• Concurrently, we have raised DBS's 2022-23E loan growth estimates by 1-2% to reflect guidance and broader regional re-opening.

Potential for Lower Allowances, But NPL Risk Exists

• Together with write-backs, DBS's overall credit charges fell Chinese economy and rising rates pressuring SMEs are key risks to watch out for going forward, we believe.

Maintain BUY Call on DBS

• We have conservatively raised DBS's 2022-23E EPS forecast by 7-8% price, DBS would trade at 1.7x P/B.

• Over the next 3-years, DBS’s structural ROE is set to rise 374bps to 14.3% vs the past 10-years. Therefore, we think a higher multiple is justified. Indeed, pre-GFC, when Group ROEs were closer to 11%, DBS has traded up to 1.8x.
• Additionally, with three big recent acquisitions to digest, we believe DBS has increased room for higher dividend payouts rather than expending additional capital for growth.

Source: Maybank Kim Eng Research - 14 Feb 2022