DBS

Phillip Securities Research on Feb 13 2012

DBS FY2011 earnings were within expectations. Net interest income beat expectations due to higher loans growth while net interest margins (NIMs) were maintained at 1.73 per cent. But fees and commissions missed estimates as we had expected higher customer flows. Net profit was within expectations, with DBS sustaining the earnings momentum from previous quarters. Although profits decreased q-o-q, this is expected due to seasonal slowdowns near year-ends.


DBS has reported strong earnings for the last two quarters. Although management believes this to be sustainable rather than opportunistic growth, we are not certain if DBS would be able to continue producing strong earnings in the medium term.

DBS has, in recent quarters, experienced growth especially due to the problems in Europe. Trade finance has been growing, contributing to the 60.2 per cent y-o-y growth of the US dollar loan book, as European traditional powerhouses experiencing capital adequacy difficulties have flat or negative growth.

US-dollar deposits for DBS have grown in the US due to multinational companies choosing DBS for its high credit rating, as they fear a banking crisis due to European banks' potential write-downs of exposures to eurozone debts. Private banking clients are attracted to DBS for the same reason.

However, when the US and European economies pick up and capital requirements loosen, foreign banks may once again regain the confidence of the market and customers may shift back to these banks due to strong prior relationships enjoyed with these banks, better brand recognition, and better rates that they may be able to offer due to their high liquidity and aggressiveness for growth.

If DBS were to lose its customers to these traditional powerhouses, its net profits would be affected, especially with the group targeting Greater China to contribute over one-third of the group's revenue.
In contrast, growth in South-east Asia may be more stable due to geographical closeness breeding familiarity with the group and typically higher interest margins, even after policy rate cuts in Indonesia, Thailand, and the Philippines.

We therefore have doubts about the ability of the group to deliver strong performances in Greater China and India with the eventual recovery of the US and Europe economy. The strong performance of DBS, which met our expectations, may have already been priced in by the markets. We therefore see limited upward potential for the stock. The dividend yield of 4.1 per cent at current prices may be attractive. We therefore maintain our 'hold' call and raise our target price to $14.50 from $13.38.
HOLD