DBS Group is the holding company for DBS Bank Ltd that provides various banking services for consumers, corporate, SMEs and wholesale banking activities mainly in Asia. Its main operations are in Singapore and Hong Kong, and its current focus is on China, Taiwan and India. 

-  DBS may face possible headwinds from worsening credit quality in India and China, while a potential credit rating downgrade following Moody's downgrade to Negative outlook may increase DBS's cost of funding.

-  Downgrade to Neutral with unchanged target price of S$15.10 based on unchanged P/B of 1.18X.

DBS  share price has increased significantly YTD, while rewarding shareholders with attractive dividends. Since we upgraded the stock at S$13.70 on 25 Apr 12, we have generated returns of 8.5% including S$0.56 of dividends.

We think that DBS may face  possible  headwinds moving forward due to the following factors:

-  Possible credit quality deterioration in India and China 'The Reserve Bank of India (RBI) recently warned of worsening condition of soured credit due to the slowing economy. Although DBS's exposure to India is not disclosed, we expect it to be significant based on DBS's guided business focus. China's bad debts have also been increasing, while the economy grew at the slowest pace in three years at 7.6%. DBS may be affected due to its significant exposure in China.  Similarly, the high quality of customers that select carefully may mitigate credit risk. We remain cautious on DBS's India and China exposure.

-  Moody's downgrade  to negative outlook on DBS  ' Moody's recent downgrade, based on a changing credit profile due to its potential rapid growth in size and geographic scope,  may reduce DBS's attraction as a safe haven for deposits by MNCs. This possibly reduces cheap funding  for the bank. A rating downgrade may also increase DBS's borrowing cost of wholesale funding.

-  DBS's management has lowered their FY12 guidance on  Loans growth and  possible  NIMs compression. Furthermore, DBS's 2Q12 earnings was weaker relative to local peers. Fees and commission was volatile and weaker than those of its peers, due largely to weak Wealth Management and Stock brokering income.

Based on the above, we see limited upward potential for DBS, although we maintain that DBS remains strong fundamentally, and revenue growth is expected to remain healthy.  We  downgrade our rating  to Neutral with an unchanged target price of S$15.10, based on P/B of 1.18X.

Source: Phillip Capital