DBS Group

Kim Eng on 30 Mar 2012

Earnings risk. With Singapore, Hong Kong and Greater China accounting for about 86% of 2011 pretax, DBS’s earnings are susceptible to a slowdown in China and the global economies, while corporate/treasury exposure (81% of earnings, vs. 65% for OCBC and 66% for UOB) add to the volatility. Valuations reflect the low prospective ROE of 10.3% that we are projecting, with downside risk, in our view. Strong fundamentals notwithstanding, our Sell call is maintained, with an unchanged TP of RM11.50 (2012 P/BV of 0.9x).

Results filtering through. Just over a year into the job and CEO Piyush Gupta’s initiatives are beginning to deliver results, with enhancement to the group’s cash management and trade financing capabilities. Moreover, treasury operations are more client-driven than before. Other areas of focus moving forward would be in strengthening its regional SME presence as well as increasing regional contributions. Cross-selling opportunities will have to be stepped up if normalised ROE targets of 12-13% are to be achieved.

Loan growth and NIM expectations. Low-teens loan growth is still the guidance this year (our forecast: 10.7%), with extra attention to be paid to the shipping, SME and property markets. NIMs are expected to be stable, for corporates have been willing to pay a little more premium for stable funding, while housing rates appear to have stabilised for now. USD funding cost however is still rising, while funding costs are also still high for the group’s Hong Kong operations.

More than ample liquidity. S$ liquidity is abundant and POSB provides it with access to a sizeable pool of low-cost CASA, so much so that the bank has decided to price itself out of the fixed deposit market. As for USD liquidity, MNCs are a source of funding while DBS’ market share of the active S$:USD swap market is about 20-25%.

40% of NPLs still performing. There are no signs at this juncture of any stress in the loan book. The specific loan to a European shipper that was classified as an NPL in 4Q11 is still performing at this stage, as is 40% of the group’s total NPLs.