SINGAPORE (Jan 21): RHB Research is maintaining its “buy” call on DBS Group Holdings with an unchanged target price of $29.80.

This comes on the back of expectations of still more upside ahead, led by widening net interest margin (NIM).

Analyst Leng Seng Choon notes that the 3-month SIBOR has been on a rising trend. It currently stands at 1.89%, after hitting an average of 1.73% in 4Q18 – some 0.1 percentage point higher than the preceding quarter.

While he explains that there is some lag effect from the SIBOR rise to filter through to NIM widening, Leng believes DBS’ 4Q18 NIM would have widened from 1.86% in 3Q18.

“We forecast a higher 2019 NIM of 1.92%, premised on a gradually rising US federal funds rate (FFR),” Leng says in a report on Monday.

In addition, Leng cites Bloomberg data that showed that DBS’ 12-month fixed deposit rate for amounts less than $500,000 has risen to 0.95% in early January 2019, from 0.6% in mid-2018.

“This reflects the impact of a rising SIBOR,” he says. “Whilst this will raise cost of funds, lending yields would have risen more, thereby contributing to a likely wider 4Q18 NIM.”

Meanwhile, Leng believes DBS’ digitalisation initiatives will result in lower cost income ratio (CIR) over the next few years.

“We see PayNow as an example of a nation-wide initiative that could lead to lower usage of cash notes, helping banks lower their CIR over the longer term,” he says, adding that he is “positive” on DBS’ digital push.

As at 4.12pm, shares in DBS are trading 4 cents higher at $25.18, representing an upside of more than 18%. According to RHB valuations, this implies a price-to-earnings ratio of 10.1 times and a dividend yield of 4.8% for FY19.

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