SINGAPORE (Jan 9): RHB expects DBS’ share price performance, which was already strong since the US presidential election results, to surge even further from higher Singapore interest rates in the near-term.

As such, it is maintaining its “buy” call on DBS as its top pick in the banking sector with a target price of $18.38.

In a report on Tuesday, analyst Leng Seng Choon explains that DBS is a key beneficiary of the expected Singapore Interbank Offered Rate (SIBOR) rise as the market expects the Fed Funds rate to continue its incline in 2017.

“Given the positive correlation between the US Fed Funds rate and SIBOR, we believe SIBOR would be on an uptrend. The three-month SIBOR has already risen to 0.93%, from end-October’s 0.87%, and further increases can be expected through 2017,” notes Leng.

While some market placers remain concerned regarding the bank’s exposure to the oil and gas (O&G) space, the analyst points out that DBS has $16 billion worth of loans in this category which represents 5.4% of its loan book.

He also highlights that its management has guided for 2017 cost of credit to be “similar to the level for 2016”, excluding the provisions made for Swiber.

“We forecast 2017 credit cost of >40bps, higher than 9M16’s 32bps – which implies that our earnings forecasts are conservative. The end-November OPEC agreement to share production cuts could lead to firmer crude oil prices and reduce some pressure on oil & gas plays,” Leng posits.    

As at 11.53pm, shares of DBS are trading 10 cents higher at $17.77.