Share Price S$17.09
Target Price S$21.50
DBS Group Holdings (DBS) was established in 1968 to provide financial assistance to the manufacturing sector so as to promote industrialisation. It was restructured as a holding company in 1999. It bought the Post Office Savings Bank (POSB) for S$1.6b in 1998, acquiring the latter’s huge retail customer base. DBS acquired Dao Heng Bank in Hong Kong in 2001, which was integrated with DBS Kwong On Bank. DBS established its presence in Taiwan through the acquisition of the “good bank assets” of Bowa Bank in Feb 08. DBS was incorporated in China in May 07 and has 29 branches in 10 cities.
• New management team has solid track record. DBS has a strong management team led by CEO Piyush Gupta, which has demonstrated an ability to generate organic growth. It unveiled its nine strategic priorities in Feb 10. Since then, the blueprint has generated organic growth with net interest income and non-interest income expanding at a 3-year CAGR of 5.9% and 14.6% respectively in 2009-12. For 9M13, net interest income increased 3.1% while non-interest income grew 25.9%.
• Noticeable turnaround in Hong Kong. NIM in Hong Kong has improved through reduction of exposure to housing loans and a shift to corporate loans, including SME loans and trade finance facilities. DBS generated growth in non-interest income from wealth management and offshore Rmb (CNH) activities. DBS Hong Kong’s net profit grew 14.6% to S$635m in 9M13, which accounted for 23.5% of group net profit.
• New initiative to build DCM. DBS plans to intensify efforts to build its debt capital market (DCM) capabilities. According to the Asian Development Bank, Asia needs to invest US$8t in national infrastructure between 2010 and 2020. Many Asian countries face fiscal constraints and will need to rely on the bond market to finance their infrastructure projects. Singapore is well suited to be an issuance centre given its vibrant fund management industry and indepth knowledge of ASEAN.
• Undervalued and likely to outperform. Current depressed P/B of 1.28x does not fully reflect the intrinsic worth of DBS. Our target price of S$21.50 is based on 1.51x 2014F P/B, derived from the Gordon Growth Model (ROE: 11.0%, required return: 7.8% and constant growth: 1.5%).
Publish date: 28/11/13