Wednesday, 26 March 2014

DBS Group Holdings

UOBKayhian on 26 Mar 2014

FY14F PB (x): 1.1
FY15F PB (x): 1.0

DBS has utilised trade finance facilities to penetrate corporate customers in China. Asset quality should not be unduly affected as they have short durations averaging six months and are well collateralised. DBS is well positioned to benefit from growth in offshore renminbi due to its established capabilities in treasury and network of corporate customers in China.

Singapore a centre for offshore renminbi. As part of enhanced financial services cooperation under the China-Singapore free trade agreement, People’s Bank of China has appointed ICBC’s Singapore branch as a renminbi-clearing bank on in Feb 13. Since then, renminbi deposits in Singapore have grown 70% to Rmb200b. Singapore benefits from the change in regulation that allowed multinational companies (MNCs) operating in China to hold excess renminbi offshore to centralise cash management. Many MNCs have keen interest in settling renminbi trades and setting up regional treasury centres in Singapore. Singapore accounted for 60% of renminbi trade finance volume outside Hong Kong and China.

In Hong Kong, DBS is already a leading player in offshore Rmb (CNH). It has an estimated share of 10% in the interbank CNH spot market. It is an active market-maker in US$/Rmb non-deliverable forwards, US$/Rmb non-deliverable swaps and renminbi non-deliverable interest rate swaps. The growth from offshore renminbi is encouraging. Renminbi-denominated trade finance facilities were 12% of total trade finance volume in 2012. The proportion has expanded to 25% in 2013, which means that offshore renminbi accounted for 70% of the growth in DBS’ trade finance business. Maintain BUY. Our target price of S$21.90 is based on 1.51x P/B, derived from the Gordon Growth Model (ROE: 11.0%, required return: 7.8% and constant growth: 1.5%).

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