Friday, March 30, 2012

DBS : Susceptible to headwinds (KE)

DBS Group Holdings
Sell (unchanged)
Share price: S$14.20
Target price: S$11.50 (unchanged)
Susceptible to headwinds

Earnings risk. With Singapore, Hong Kong and Greater China accounting for about 86% of 2011 pretax, DBS’s earnings are susceptible to a slowdown in China and the global economies, while corporate/treasury exposure (81% of earnings, vs. 65% for OCBC and 66% for UOB) add to the volatility. Valuations reflect the low prospective ROE of 10.3% that we are projecting, with downside risk, in our view. Strong fundamentals notwithstanding, our Sell call is maintained, with an unchanged TP of RM11.50 (2012 P/BV of 0.9x).

Results filtering through. Just over a year into the job and CEO Piyush Gupta’s initiatives are beginning to deliver results, with enhancement to the group’s cash management and trade financing capabilities. Moreover, treasury operations are more client-driven than before. Other areas of focus moving forward would be in strengthening its regional SME presence as well as increasing regional contributions. Cross-selling opportunities will have to be stepped up if normalised ROE targets of 12-13% are to be achieved.

Loan growth and NIM expectations. Low-teens loan growth is still the guidance this year (our forecast: 10.7%), with extra attention to be paid to the shipping, SME and property markets. NIMs are expected to be stable, for corporates have been willing to pay a little more premium for stable funding, while housing rates appear to have stabilised for now. USD funding cost however is still rising, while funding costs are also still high for the group’s Hong Kong operations.

More than ample liquidity. S$ liquidity is abundant and POSB provides it with access to a sizeable pool of low-cost CASA, so much so that the bank has decided to price itself out of the fixed deposit market. As for USD liquidity, MNCs are a source of funding while DBS’ market share of the active S$:USD swap market is about 20-25%.

40% of NPLs still performing. There are no signs at this juncture of any stress in the loan book. The specific loan to a European shipper that was classified as an NPL in 4Q11 is still performing at this stage, as is 40% of the group’s total NPLs.


Earnings risk. With Singapore, Hong Kong and Greater China accounting for about 86% of 2011 pretax, DBS’s earnings are susceptible to a slowdown in China and the global economies, while corporate/treasury exposure (81% of earnings, vs. 65% for OCBC and 66% for UOB) add to the volatility. Valuations reflect the low prospective ROE of 10.3% that we are projecting, with downside risk, in our view. Strong fundamentals notwithstanding, our Sell call is maintained, with an unchanged TP of RM11.50 (2012 P/BV of 0.9x).

Results filtering through. Just over a year into the job and CEO Piyush Gupta’s initiatives are beginning to deliver results, with enhancement to the group’s cash management and trade financing capabilities. Moreover, treasury operations are more client-driven than before. Other areas of focus moving forward would be in strengthening its regional SME presence as well as increasing regional contributions. Cross-selling opportunities will have to be stepped up if normalised ROE targets of 12-13% are to be achieved.

Loan growth and NIM expectations. Low-teens loan growth is still the guidance this year (our forecast: 10.7%), with extra attention to be paid to the shipping, SME and property markets. NIMs are expected to be stable, for corporates have been willing to pay a little more premium for stable funding, while housing rates appear to have stabilised for now. USD funding cost however is still rising, while funding costs are also still high for the group’s Hong Kong operations.

More than ample liquidity. S$ liquidity is abundant and POSB provides it with access to a sizeable pool of low-cost CASA, so much so that the bank has decided to price itself out of the fixed deposit market. As for USD liquidity, MNCs are a source of funding while DBS’ market share of the active S$:USD swap market is about 20-25%.

40% of NPLs still performing. There are no signs at this juncture of any stress in the loan book. The specific loan to a European shipper that was classified as an NPL in 4Q11 is still performing at this stage, as is 40% of the group’s total NPLs.


• USD:SGD swaps. With the Monetary Authority of Singapore (MAS) a major counterparty, this is a very liquid market, of which DBS’ market share is about 20-25%.
• MTNs and commercial term note issues, for which there is no shortage of demand, particularly with strong liquidity in Asia.

More than ample S$ liquidity, pricing itself out of fixed deposits. The one factor that works to DBS’ advantage is POSB, which provides it with a large pool of CASA. CASA accounted for 62% of DBS’ total deposits at end-2011 versus 46% for OCBC and 40% for UOB.

Guidance for stable margins maintained. Corporates are willing to pay a little bit more premium for funding line stability and this has translated to better pricing power for the local banks. In terms of housing loans, there has been some upward repricing of rates by the foreign banks, which has led to better spreads. This market nevertheless remains competitive and pressures remain. There could be a drag in USD funding cost which is still rising, while funding costs are also still high for the group’s Hong Kong operations.

40% of NPLs still performing. There are still no signs at this juncture of any stress in the loan book. The specific loan to a European shipper that was classified as an NPL in 4Q11 is still performing at this stage, as is 40% of the group’s total NPLs.

More vulnerable to external headwinds

Fundamentals strong, but economic headwinds still a drag. Fundamentals of the group continue to be strong, but we do feel that economic headwinds still pose a risk to earnings, particularly since:
a) Singapore, Hong Kong and Greater China account for a sizeable 86% of group earnings, which does imply greater susceptibility to a slowdown in China and the global economies.

Has outperformed. To date, DBS’ share price has outperformed its peers, rising 22% YTD versus 18% for UOB and 13% OCBC, as well as beating the FSSTI’s 12% gain.

Fundamentals strong, but economic headwinds still a drag. Fundamentals of the group continue to be strong, but we do feel that economic headwinds still pose a risk to earnings, particularly since:
a) Singapore, Hong Kong and Greater China account for a sizeable 86% of group earnings, which does imply greater susceptibility to a slowdown in China and the global economies.

b) DBS’ exposure to corporate and treasury is larger than its peers’. On a segmental basis, corporate/investment banking accounted for 61% of DBS’ group pretax in 2011, as compared to 43% for OCBC and 52% for UOB. Treasury operations, meanwhile, made up 20% for DBS versus 22% for OCBC and 14% for UOB. Amid uncertainties and more volatile markets, earnings risks are higher for DBS, in our view.

Valuations not demanding, but risk is to the downside. DBS presently trades at a 2012 P/BV of 1.1x, which is about 1 sd below its mean of 1.4x. Understandably, valuations are not demanding at this stage but the low P/BV very much reflects the group’s prospective ROE of 10.3%. With earnings risks to the downside, we believe that lower valuations are still justified and our target price continues to peg the stock to a prospective 2012 P/BV of 0.9x. This compares to a P/BV trough of 0.6x during the GFC.



Source/Extract/Excerpts/来源/转贴/摘录: Maybank Kim Eng Research
Publish date: 30/03/12

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