DBS - Buy: New Target S$15.50; Raising EPS Estimates 2%-18%

Target S$15.50 (1.46x '09E P/B): DBS has retraced 10% from recent highs on concerns of sharply rising NPLs. But DBS' provisions-hit 2Q09 ROAE of 9.3% belies record pre-provision operating profits, and a PPOP ROAA of 1.73%, back to the 2007 peak. The P&L provisions cycle should start to normalize over 2010E for a 2011E ROAE of 12%. Our 12-month target has been reset to DBS' mid-cycle P/B multiple of 1.46x.

2Q09 pre-provision profit a record S$1.16bn: DBS' 2Q09 PPOP is up 30% vs. 2Q07 (the last economic cycle peak). Loan growth +29% over 2 years drove 8% net interest income growth despite NIM pressure from low S$ SIBOR, while basic bank fees remained resilient. Markets-related income has been a key boost to 2Q09 revenues, but operating costs are 4% lower than in 2Q07 despite a much larger balance sheet, for a 2Q09 cost-income ratio of just 35%.

2Q09 NPLs, +36%qoq, the area of concern: NPLs rose to S$3.7bn on a S$1bn rise in "rest of world" (Middle East and shipping) NPLs, but as "substandard" NPLs, mgmt do not expect large losses, stressing that 38% of all NPLs are fully current. We expect NPLs to peak by end-2010E, and provisions to return to "normalized" levels by 2011E, markets pricing in normalization ahead of that.

Raising 2009-11E EPS estimates 2-18%: We now project profit growth of +25% in '10E and +22% in '11E on [1] 3-7% loan growth; [2] modest NIM improvement to 210bps; [3] PPOP ROAA of 1.7%, [2] provisions falling from 133bps in '09E to 50bps in'11E. Our 2009E profit forecast of S$2bn remains 12% above Bloomberg consensus estimates.

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