CFA Society Singapore
SINGAPORE (Apr 11): RHB still has a “buy” call on DBS, with a higher target price of $29.60 from $28.80 previously. This is based on a 2020F price-to-book ratio of 1.43 times, giving a 10% upside and a 4% FY19 yield.
In a Wednesday report, analyst Leng Seng Choon says, “We believe our long-term ROE assumption of 13.5% (vs 2018’s 12.2%) is achievable given greater NIM expansion in 1H19 on top of digitisation-driven cost efficiencies. We spoke with DBS’s management – key takeaways are highlighted in this report.”
In February, the management guided for 2019 NIM to be 4-5 bps wider than 2018’s.
Home mortgage interest rates, which are pegged to fixed deposit rates or Fixed Deposit Home Rate (FHR), saw increases in January and March, which had a significant effect on the bank as half of its home mortgages are FHR-based.
“We should see some NIM widening in 1Q19 arising from the January mortgage rate rise. The March mortgage rate rise will likely raise NIM from 2Q19 onwards,” says Leng.
Meanwhile, the rising SIBOR is expected to help raise lending yields for business loans.
In 1Q19, 3-month SIBOR averaged 1.92%, higher than the 1.73% average in 4Q18 and 1.63% in 3Q18. Since business loan repricing typically lags by about three months, the business loans’ lending yields would have risen in 1Q19, with more increases expected in 2Q19.
On the other hand, home mortgage growth home mortgage growth is weak but growth from business lending is expected to stay respectable. The management has guided for a mid-single digit 2019 loan growth.
The management has also in February guided for 2019 ROE of 12.5% compared to 12.1% in 2018, assuming no FFR hikes in 2019. Leng believes that digitalisation efforts could contribute to further ROE enhancement over the next few years.
As at 12.10pm, shares in DBS are trading 13 cents higher at $27.10.