PhillipCapital research analyst Tay Wee Kuang has upgraded his recommendation on DBS Group Holdings to “accumulate” from “neutral” with a higher target price (TP) of $29.50 from $22.60 previously.

See: It's time to 'buy' DBS despite the plunge in its FY2020 net profit, analysts say


For Tay, the bank’s FY2020 earnings stood “in line” with his expectations as weaker-than-expected income was offset by lower credit costs.

For the 4QFY2020, the bank reported 1% growth y-o-y in fees and commissions to $747 million, which were back to pre-Covid-19 levels.

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Wealth management (WM) fees grew 21% y-o-y, which offset lower fees in investment banking and credit card.

“We forecast 12% growth in fees and commissions for FY2021 as economic conditions improve. Investment-banking and credit-card fees are expected to recover to pre-Covid-19 levels while WM fees should continue to power ahead,” says Tay in a Feb 15 report.

During the quarter, the bank reported allowances of $577 million, 4% higher q-o-q, which included $183 million of general provisions from its consolidation of Lakshimi Vilas Bank (LVB). The allowances matched the bank’s 3QFY2020 levels despite the consolidation of the troubled Indian bank.

Allowances for the FY2020 totalled some $3 billion, which was at the lower end of the $3 billion to $5 billion guided by the bank for FY2020/FY2021.

The bank’s reserves from its general provisions reached $4.31 billion during the year, higher than the requirement set out by the Monetary Authority of Singapore (MAS) by 42%, which is seen as yet another positive for Tay.

“We think that FY2020 provisions will be sufficient for asset-quality deterioration in FY2021 and expect credit costs to normalise to pre-Covid levels along with the economic recovery,” he says.

On the downside, DBS’s net interest margin (NIM) fell by 4 basis points q-o-q, contributing to a 2% decline q-o-q in net interest income (NII).

FY2020 NII fell 6% on a 27-basis point decline y-o-y in NIM, though it was mitigated by a 4% y-o-y growth in loans during the same period.

“The bank guided for NIM of 1.45-1.50% for FY2021 as interest rates stabilise. Nevertheless, a cheap funding environment should allow it to continue with its low-yield lending, including interbank loans, to boost NII,” says Tay.

Looking ahead, Tay says he sees “clarity” as loans under moratorium fell to $4.5 billion to about 1.2% of DBS’s loan book.

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“Low delinquencies from the loans that exited moratorium support a lower credit-cost forecast of $1 billion for FY2021. This implies FY2020-FY2021 allowances of $4 billion, midway of the $3 billion to $5 billion range guided by the bank,” he notes.

Furthermore, he expects the bank’s consolidation of LVB to expand its footprint in India.

“Earlier operating concerns have waned after DBS took decisive action to provide for NPAs,” he says.

DBS’s securities joint venture in China and digital-exchange partnership with Singapore Exchange (SGX) “are also expected to augment its business from FY2021”.

On that, Tay has also upped DBS’s FY2021 earnings estimates by 6%, as he lowers allowances of $1 billion.

“We also lower cost of equity (COE) in our Gordon Growth Model (GGM) valuation from 9.4% to 8.2% and assume a 10.1% FY2021 return on equity (ROE). This reflects lower risks as equity markets improve,” he adds.

Shares in DBS closed 19 cents lower or 0.7% down at $25.88 on Feb 15.