DBS: Getting a boost from better fee income

DBS has staged remarkably >100% gains. In tandem with global equity markets, the Singapore market also staged a good rally in 2Q 2009, with the STI appreciating 67% from the 2009 low in March to the recent high of 2424.52. Together with renewed wave of buying, this also benefited the banking stocks. DBS, which hit a low of S$6.42 in Mar 2009, has since recovered to a high of S$12.90, more than doubling from the low. Over the past few days, a much-need breather has entered the market and we view this correction positively. There are also some signs of market fatigue, as reflected by the decline in daily trading volume and value on the local exchange as well as the drop in market breadth (with more declining issues than advancing issues on a daily basis).

Present weakness presents trading opportunity. This has thrown up an opportunity to buy into the banking sector again. There is also a gradual shift recently to defensive stocks and DBS offers a good dividend yield of 4.1% (based on our reduced DPS estimate of 46 S cents for FY09 versus 65 S cents in FY08).

Flood of rights issues should boost its fee income. In 1Q09, we saw some capital market raising exercises locally, but the momentum gathered pace in 2Q 2009, led by several government-linked entities. We note that DBS was one of the key underwriters/managers of these issues (see exhibit 1) and we expect fee income to get a significant boost this quarter even if impairments remain high. In addition, the improvement in the equity market should also boost other fee-related income.

Upgrade to BUY. Since hitting a recent high of S$12.90, the stock has corrected and closed at S$11.20 yesterday, down 13.2%. We are maintaining our FY09 earnings estimates for now, noting that impairment charges could remain high in 2Q and 3Q, albeit lower than the 1Q level of S$437m. We are also maintaining our peg at 1.2x book and our fair value estimate of S$12.40 for now, until we see further re-rating for the sector and the market. As there is a potential upside of more than 10% from current level coupled with the estimated yield of 4.1%, we are upgrading the stock to BUY. Accumulate at current level and lower.

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