As DBS Group Holdings’ reported a record quarterly net profit of $2.01 billion for the 1QFY2021 ended March, analysts from CGS-CIMB Research, RHB Group Research and UOB Kay Hian have maintained “add” or “buy” on the bank with raised target prices.
See: DBS posts record quarterly net profit of $2.01 bil in 1Q21; maintains dividend of 18 cents per share and DBS’s net profit of $2 billion in 1QFY2021 sets tone for FY2021
The bank’s robust results surpassed expectations from all three brokerages, as well as consensus’ estimates of $1.5 billion in net profit.
CGS-CIMB analysts Andrea Choong and Lim Siew Khee have increased DBS’s target price to $32.64 from $28.35 previously as the bank hit the “bullseye” with “all cylinders firing in the 1QFY2021”.
To Choong and Lim, DBS’s robust wealth income, as well as a recovery in regional GDP growth, will aid in driving double-digit fee income growth in the FY2021.
“We think that an improvement of return on equity (ROE) to 12% in FY2021 [from 9% in FY2020] is justified, giving its robust non-interest income growth trajectory, offsetting net interest income (NII) weakness,” they write.
As the bank’s impairment write-back – a “key positive surprise” – contributed to its net profit for the 1QFY2021, Choong and Lim see that some $1 billion could be written back, taking into account DBS’s capital needs, when residual risks from the moratoriums taper off.
The write-back, say the analysts, could mean an earnings boost to come.
On this Choong and Lim have raised their earnings per share (EPS) estimates for the FY2021-FY2023 by 8% to 16% as they factor in strong non-interest income, higher loan growth and reduced credit costs.
As DBS remains on the look-out for meaningful acquisitions, Choong and Lim view India, Indonesia and Taiwan – as the three countries out of the 13 markets for sale – to offer the best value to the bank given its geographical exposure.
“A meaningful acquisition could improve capital efficiency to 12.5%-13.5%,” they write.
“We think that improved asset quality metrics (lower non-performing asset or NPA formation, rising repayments) make a case for lowering our credit costs estimates to 16 basis points (from 26 basis points) in FY2021 (we assumed steady-state-specific provisions). Although DBS trades at a premium to peers at 1.4 times FY2021 price-to-book value (P/BV), we see more value enhancement going forward as its revenue drivers scale new highs.”
PhillipCapital’s senior research analyst Terence Chua has, too, upped his target price on DBS to $31.40 from $29.50.
“We now assume 1.36 times FY2021 P/BV in our Gordon Growth Model (GGM) valuation, up from 1.31 times,” he writes.
While Chua is largely positive on DBS, with FY2021 provisions being “sufficient” to account for asset-quality deterioration in FY2021, and credit costs to normalise to pre-Covid-19 levels along with the economic recovery, the lack of an indication as to when the Monetary Authority of Singapore (MAS) will lift its dividend cap poses a slight negative to the counter.
That said, “with its capital and liquidity – CET-1 ratio of 14.3% in 1QFY2021 vs. 13.9% [in 2020] - well above regulatory requirements and high allowance reserves, we believe the bank will revert to 33 cents per quarter or an annualised DPS of $1.32 once the cap is lifted. We do not rule out special dividends,” he writes.
“We also lower allowance estimates for FY2021. Consequently, our earnings for FY2021/FY2022 are raised by 5.6%/1.0%,” he adds.
On the back of a strengthening of the global economy, Chua expects DBS’s business momentum to be strong. On this, he has upgraded his estimates for FY2021 and FY2022’s fee income by 2.6% and 2.7% respectively.
RHB’s Singapore research team has raised its target price on DBS to $34 from $33 as they project the bank’s ROE to recover to pre-pandemic levels in FY2022.
The new target price is based on a P/BV of 1.5 times at +2 standard deviation (s.d.) from its historical mean, says the team.
It has also raised its net profit estimates for the FY2021 – FY2022 by 7% to 8%.
“We believe DBS remains a good proxy to Singapore’s economic recovery, [although] downside risk to our investment view would come from acquisitions that could overstretch management resources,” writes the RHB team.
Of the bank’s results, RHB highlighted the 15% y-o-y surge in net fee income, higher treasury income, well-controlled assets and solid asset quality that led to a write-back of $190 million in general provisions.
On an annualised basis, net fee income for the 1QFY2021 point to a 25% y-o-y increase. As DBS’s management have kept its guidance for a double-digit growth for FY2021, the RHB team says it has factored in a “more conservative” growth of 17% y-o-y.
On DBS’s looking at assets to enhance its franchise, including Citibank’s retail business that is up for sale, RHB notes that Citi’s businesses that would be of interest to DBS are CitiGold and its credit cards unit.
UOB Kay Hian analyst Jonathan Koh is the most buoyant on DBS’s share price target with a revised target price estimate of $35.45 from $33.30 previously.
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“Our target price of S$35.45 is based on 1.56 times FY2022 P/B, derived from Gordon Growth model (ROE: 11.3%, COE: 7.75%, Growth: 1.5%),” he writes.
The bank’s 1QFY2021 results came in “vastly” above his expectations of $1.42 billion.
He, too, has raised his net profit forecast for FY2021 by 12.5% due to stronger loan growth of 8.4%, stronger fee income growth of 16.3% and lower credit costs of 21 basis points.
In his report, Koh also expects DBS’s dividend yield to improve to 4.4% in FY2022, from 3.6 in FY2021.
Shares in DBS closed 32 cents lower or 1.07% down at $29.59 on May 3, or 1.4 times P/B, according to UOB Kay Hian’s estimates.
