DBS Group Holdings

Deutsche Bank Markets Research, June 25

DBS'S share price has underperformed the index by 4 per cent and its peer UOB by 7 per cent year to date. The underperformance is a reflection of higher uncertainty in mainland China, where DBS has higher exposure.

But the latest Q1-14 result should provide a better comfort level for investors; our recent study of DBS HK also suggests its HK operation remains on course for delivering sustainable growth. DBS remains our top pick among SG banks.

It has been noticeable in recent years that the HK operation has been a consistent earnings contributor to DBS and the transformation has continued to work well. The mortgage book in HK has contracted further to 15 per cent (27 per cent in FY07), with increased focus on trade finance lending (33 per cent versus 18 per cent in FY07). The fee income contribution still ranks the best among HK peers at 36 per cent of NII, with growing focus on the mass affluent/wealth management segment.

A recent consumer survey in HK has shown some banks cutting their branch exposure (including DBS), but we believe the magnitude of the cut to be part of DBS's strategy to transform into a more efficient bank.

Although its network has fallen to 51 (-15 per cent from FY11), profitability per branch has consistently improved to S$17 million/branch in FY13, making for a CAGR or compound annual growth rate of 21 per cent since 2009.

In fact, the profitability per branch is one of the highest among its domestic peers in HK.

Our preference is for DBS over UOB - UOB has its own concerns as well. UOB's NIM (net interest margin) fell 1bp q-o-q (versus a pick-up for DBS and OCBC).

Despite margin tapering in China, the margin outlook should be more resilient in HK and Singapore than in other Asean markets (such as Malaysia, Indonesia and Thailand), where UOB has 22 per cent lending exposure and may face higher vulnerability, with Malaysia and Thailand having among the highest household debt to gross domestic product in the region.

We continue to prefer DBS to UOB (Hold; S$22.42); it has a more compelling valuation (1.2x P/B vs. UOB's 1.4x 2014E P/B), owns the best CASA (current and savings account) franchise in Singapore, and is most positively geared to rising rates. We value DBS on GGM (Gordon growth model). The 12-month price target is S$19.50. Risks include asset quality risk in India and Indonesia or a harsh property price correction.

BUY