September 9, 2019

Market expectations are for the US Fed to cut the FFR at the mid-September FOMC meeting. Given the historical positive correlation between the US FFR and 3-month SIBOR, we expect further softness in the latter. Amongst Singapore banks, DBS’ NIM is the most leveraged to changes in the 3-month SIBOR. We forecast its NIM to narrow in the quarters ahead, a negative headwind for its earnings. Our Top Pick is UOB.

Market expectations are for a 25bps cut in the US federal funds rate (FFR) in the mid-September Federal Open Market Committee (FOMC) meeting. The consensus is for a further 25bps cut at the subsequent end-October FOMC meeting. This should translate to further softness in the 3-month SIBOR – current 3-month SIBOR of 1.88% is already 10bps lower than the 2Q19 average of 1.98%. During the 2Q19 results briefing, DBS management guided for 3Q19 NIM to be 1bp narrower QoQ, with a further 1-2bps QoQ narrowing for 4Q19. We forecast DBS 2020 NIM of 1.86%, lower than 2Q19’s 1.91%.

29.9% of DBS’ loans are to Greater China, higher than OCBC’s 24.2% and UOB’s 15.7%. With the current trade war between US and China adversely affecting China’s economic growth, DBS’ larger percentage exposure is not a positive, as there is a risk of higher NPLs from the economic slowdown.

DBS recently said foot traffic in its Singapore branches declined 5% annually over the past few years. It added that it will likely need fewer outlets in the future, although they won’t disappear completely – some branches are needed to maintain branding and last-mile services. Digitisation efforts should also contribute to costs being kept under control. However, this positive may not be significant within the next two years.

We forecast 2019 dividend of SGD1.20/share (4.9% dividend yield) – consistent with DBS’ 2Q19 quarterly interim one-tier tax-exempt dividend of SGD0.30/share. Our DBS valuation is based on a longterm ROE assumption of 12.9% (vs 1H19’s 13.7%) – the reduction attributed to weaker NIMs plus increased competition from digital banks. This yields a 2020F target P/BV of 1.23x (close to 6-year historical average of 1.20x), from which we derive our new TP of SGD25.30. Maintain NEUTRAL. – RHB  

DBS closed at: S$24.77