SINGAPORE (Sept 17): Given the growing US economy, the market expects the US federal funds rate (FFR) to be raised by 25bps during the Sept 25-26 Federal Open Market Committee (FOMC) meeting.

Correspondingly, the three-month SIBOR -- now at 1.64% -- is expected to rise, given the historical correlation between the FFR and three-month SIBOR.

In 2Q18, the three-month SIBOR averaged 1.51%. 3Q18 to date, the SIBOR is already averaging higher at 1.63%.

“This rising trend is positive for Singapore banks’ NIM,” says RHB analyst Leng Seng Choon in a Monday report, “From DBS’ 2Q18’s NIM of 1.85%, we are forecasting NIM of 1.87% for 2018 vs management’s guided 1.86-1.87% and 1.95% for 2019.”

In late August, DBS was named the first Singaporean and Asian winner for Global Finance Magazine’s Best Bank in the World Award.

In early September, adding to its digital initiatives, DBS unveiled a service that allows wealthy clients to interact with relationship managers on WeChat and WhatsApp.

After the government’s announced property cooling measures in early July, the market was concerned that Singapore banks’ loan growth may weaken.

But recent visits by RHB Research analysts to new property showflats like JadeScape point to continued interest from potential buyers, as indicative prices were 10% lower.

“We expect mortgage growth to remain steady until end-2019, as drawdown of already approved loans take effect,” says RHB analyst Leng Seng Choo, “Loan growth from 2020 onwards should remain firm if property sales continue to be supported by lower selling prices.”

In early September, DBS priced its $1 billion of 3.98% perpetual capital securities first callable in 2025, to qualify as additional Tier 1 Capital. While this could marginally slow NIM expansion, it will strengthen DBS’ CAR ratios, says Leng.

RHB’s long-term ROE assumption is 13.8%, premised on gains from DBS’ digital strategy and nationwide digital strategies such as the Monetary Authority of Singapore-driven Paynow. Management guided for ROEs of 13-14%, with 14% being achievable if costs are well controlled.

RHB’s cost of equity (CoE) assumption is 10.2%, yielding a target P/BV of 1.51x, which is applied to its 2019F BV to derive its $30.30 target price.

“We believe the premium over its five-year historical average P/BV of 1.2x is justified given the rising NIM trend this was evident historically.

Year to date, shares in DBS are down 1.6% at $24.80 or 9.9 times FY19 earnings.

Widening NIM trend intact positive for DBS: RHB

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