DBS Group Holdings (DBS) is a high-beta play on the eventual economic recovery, which is usually accompanied by higher interest rates. High-beta play on eventual economic recovery. DBS derives the bulk of its funding from savings accounts (DBS: 42.5% of customers’ deposits, OCBC: 19.2% and UOB: 22.0%), a stable and low-cost source of funding. It was the largest lender with S$28.3b parked in the interbank market as at Mar 09 (OCBC: S$14.5b and UOB: S$12.3b), equivalent to 10.5% of total assets. Current earnings have already factored in a depressed SIBOR. Net interest margin (NIM) will rebound when Singapore recovers to positive GDP growth, bringing about a higher SIBOR.
Streamlining for greater efficiency. DBS has cut headcount, streamlined its organisational structure and “de-risked” its treasury operations. There is latent growth potential in Singapore as the bank’s Singapore-dollar loan/deposit ratio (LDR) was only 57.4% as at Mar 09. It is a leader in providing financial services to large corporate and institutional clients and could expand market share in SME and consumer lending. DBS has instilled discipline in cost management and its cost/income ratio fell from 44.3% in 2006 to 38.4% in 1Q09.
Conservative classification of NPLs. DBS adopts a conservative approach in recognising non-performing loans (NPL) and taking provisions early. About 34.2% of its NPLs are not overdue (still current in interest and principal) compared with 16.7% for OCBC and 17.1% for UOB. This indicates that DBS is more stringent and conservative in the classification of NPLs.
We have raised our assumptions for loans growth to 7.8% for 2009 (previous: 6.4%) and 8.2% for 2010 (previous: 4.9%) to factor in increased demand from property developers and housing loans. Demand from general commerce should also improve as confidence returns, particularly in Asia. We have assumed the bank’s NPL ratio will hit 4.0% by end-10. Our earnings model has imputed allowance for credit losses of 120bp in 2009 (unchanged) and 80bp in 2010 (unchanged). We raise our 2010 net profit forecast by 3.1% to S$1,934m.
Valuation is attractive with P/B at 1.18x, the lowest among Singapore banks (OCBC: 1.47x, UOB: 1.67x). Our target price of S$14.43 is based on a P/B of 1.36x, derived from the Gordon Growth Model (ROE: 9.5%, payout ratio: 55%, required return: 8% and constant growth: 4.0%).
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