DBS and POSB slash savings rates

According to media sources, DBS has slashed its deposit rates. Interest rates on the savings accounts at both DBS Bank and POSB will be trimmed by some 2.5- 12.5 bps depending on the different accounts and amount. For instance, POSB savings and passbook account holders will now be paid 0.125% (from 0.25%) for the first S$50k while DBS Savings Plus account holders will receive 0.1% for the first S$50k (vs 0.125% for the first S$3k and 0.175% for the remaining S$47k previously).

The move to slash rates to near zero is in tandem with similar cuts made by their local and foreign counterparts over the past few months. We believe the reduction will be accretive to earnings, given the Group’s large low cost deposit base. Note that CASA deposits make up around 55% of total deposits. In addition, the reduction in the deposit rates will give DBS more room to continue competing via pricing, in our opinion. Recall DBS trimmed yield on loans by close to 130 bps in FY08 compared to its peers average of 96 bps while deposit rate eased by a smaller 63 bps vs. 72 bps on average for UOB and OCBC.

We adjust our FY09/10/11 earnings forecast by 4.8/8.3/7.5% to S$1.6/2.1/2.6bn (from S$1.5/1.9/2.5bn) on the back of the increase in our NIM assumptions. Note that despite the larger decline in deposit rates, we are only imputing a 5-8bps increase in FY09-11 NIMs because we believe the impact would be muted by room for DBS to further reduce the yield on loans (although growing loans is not the Group’s primary goal amid the weak economic backdrop) and higher borrowing costs.

With that, we revise our TP from S$13.20 to S$13.80 (based on the Gordon Growth Model, assuming cost of equity of 7.5%, average ROE of 9.4% and sustainable long-term growth of 3.0% or implied PBV of 1.42x) after imputing our adjusted FY09-11 numbers. Our valuation includes the remainder of S$458mn corporate CDOs which have not been hedged or provided for.

Excluding the CDOs, we believe that DBS is valued at S$14.00. With that, we are upgrading our recommendation on DBS to Buy - premised on the potential capital gain of 20.2% from the stock’s last closing price of S$11.98. Key upside/downside risks to our fair value include: (1) better-than-expected 2Q and 3Q results, (2) potential write back on allowance for the CDOs, (3) the impact of the global recession to Singapore and Hong Kong’s trade, which will to a great extent impact GDP, (4) the impact from the downturn on both the countries’ unemployment rate, and (5) resilience of the property market as well as sustainability of property prices.

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