Analysts are mostly positive on DBS Group Holdings' growth prospects after the bank reported its results for the 4QFY2021 on Feb 14.
While Maybank Securities, RHB Group Research and UOB Kay Hian have kept their “buy” calls, OCBC Investment Research has rated the bank “hold” despite its “solid double-digit” share price gains year-to-date.
According to OCBC’s research team, the share price gains has underscored its prior calls to add positions.
“While valuations have extended, our constructive stance is maintained given multiple earnings drivers ahead from rates and a favourable macro backdrop as regional economies ease towards a post-Covid-19 world,” writes the team in its Feb 14 report.
To this end, it remains positive on DBS’s ongoing efforts on various new business drivers. This is said to bode well for the bank’s medium-term growth prospects and should continue to support improvement in its return on equities (ROEs) as the economic recovery strengthens further, it adds.
“As highlighted in our earlier reports, the Fed’s new rate hike cycle starting this year has positive implications for rate sensitive Singapore banks’ net interest margins and earnings outlook. In addition, the sector has a relatively high mix of floating rate assets, which should be repriced higher as interbank rates increase,” says the team, which has pegged a fair value estimate of $40 on DBS.
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DBS’s environmental, social and governance (ESG) performance has also pegged it above the average scoring compared to its global peers.
The bank’s subsidiary, in November 2019, became a signatory to the Equity Principles to better focus on environmental strategies in its project finance loans. DBS also has robust corporate governance practices as well as financial inclusion initiatives that involves underbanked segments and small medium enterprises, which is driven by a clear digitalization strategy (digibank app to open accounts, algorithmic models to approve small ticket sized loans etc).
“Its board is majority independent, supporting risk management oversight and executive remuneration practices are aligned well with shareholders’ long term interests,” writes the team, who has incorporated a premium in DBS’s fair value estimate for its relatively better ESG rating compared to global peers’ median score.
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To this end, the team sees DBS as a proxy to Asia’s growth and a beneficiary of improved risk appetite and global liquidity inflows into Asia equities, which are potential catalysts to its share price.
Other catalysts include better-than-expected fee income & wealth management growth and market share gains, as well as lesser-than-expected pressures on net interest margins (NIMs).
In addition, an improvement in the macro economic outlook and earnings growth expectations, and a faster-than-expected return to normalcy in key markets may drive DBS’s share price further, says the team.
Maybank analyst Thilan Wickramasinghe has raised his target price on DBS to $41.82 from $37.03 previously.
At the current target price, DBS would trade at 1.7 times price-to-book (P/B), says Wickramasinghe.
“Over the next three years, the group’s structural ROE is set to rise 374 basis points (bps) to 14.3% vs. the past 10 years. Therefore, we think a higher multiple is justified… especially as risks to dividend payouts are on the upside,” writes the analyst in his Feb 14 report.
“Indeed, pre-GFC (Global Financial Crisis), when group ROEs were closer to 11%, DBS has traded up to 1.8 times,” he continues. “Additionally, with three big recent acquisitions to digest, we believe DBS has increased room for higher dividend payouts rather than expending additional capital for growth.”
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While DBS has missed Wickramasinghe’s earnings estimates for the FY2021 slightly, he has “conservatively raised” the bank’s earnings per share (EPS) estimates by 7-8% for the FY2022-2023.
“We think [the missed estimates] is largely a timing mismatch with NIMs Additionally, with three big recent acquisitions to digest, we believe DBS has increased room for higher dividend payouts rather than expending additional capital for growth,” says the Maybank analyst.
Seeing the bank as a beneficiary on the Fed rate rise in which a 100 bps rise could’ve increased DBS’s net interest income (NII) by 21%, Wickramasinghe has forecast FY2022 NIMs to rise 18 bps y-o-y versus the 8 bps previously.
“Conservatively, we expect NIMs to recover to 2019 levels only in FY2024, leaving room for upgrades as the rate cycle becomes clearer. Concurrently, we have raised FY2022-23 loan growth by 1-2% to reflect guidance and broader regional re-opening,” he says.
DBS may see the potential for lower allowances, but the risk of non-performing loans (NPLs) exist, adds the analyst.
“Together with write-backs, overall credit charges fell to 1 bps versus 83 bps in 2020. Management expects this level to continue in FY2022, signifying additional write-backs,” he says. “Credit quality remains benign with NPLs falling to 1.3% in 4QFY2021 (1.5% 3QFY2021) with improving recoveries and settlements. Nevertheless, uncertainty on the Chinese economy and rising rates pressuring SMEs are key risks to watch out for going forward, we believe.”
PhillipCapital analyst Glenn Thum has raised his target price estimate to $41.60 from $35.90.
He has also upped his earnings estimates for the FY2022 by 2% as he ups the bank's NII estimates for the same year.
"We now assume 1.79 times FY2022 P/BV in our Gordon Growth Model (GGM) valuation, up from 1.56 times, as we raise our ROE estimates to 13.0%," he writes in his Feb 17 report.
"For FY2022, management guided benign provisions, continued growth in loans and stable NIMs. We believe there is [an] upside to NIM guidance. A 50bps move in interest can raise our earnings by 13%," he adds.
RHB’s research team has also upped its target price estimate to $42.70 from $40.40, as DBS’s FY2021 results stood within their expectations.
The new target price includes a 6% ESG premium and is based on a Gordon growth model (GGM)-derived intrinsic value of $40.26.
To the team, DBS’s sustainable business momentum in 2022, coupled with NIM recovery and the release of provisions should lift its ROE to above 13% by FY2023.
“Rate hikes are unlikely to dampen loan demand, while tight management of its small and medium enterprise (SME) portfolio should prevent a major impact. The expansion in footprint in 2021 will provide the impetus for sustained growth from FY2024,” says the team in its Feb 15 report.
Finally, UOB Kay Hian analyst Jonathan Koh has lowered his target price on DBS slightly to $40 from $40.28 despite DBS’s results coming in within his full-year expectations.
He has also tweaked his estimates on the rate hikes, with four in 2022 (from his previous prediction of three hikes), four hikes in 2023 (from three previously) and no hikes in 2024 (from his previous estimate of two hikes).4
“Management estimated positive impact to net interest income at $18 to $20 million for every 1 bp increase in US interest rates. Management’s base case assumption is four rate hikes of 25 bps each in 2022 (one hike per quarter), translating to additional total income of $1.8 to $2 billion with full impact in 2023,” writes Koh.
On the back of NIM expansion and muted credit costs of 4 bps, Koh has raised his net profit forecast for the FY2022. He has, however, lowered his net profit forecast for the FY2023 by 0.7% due to the positive impact from NIM expansion being offset by a slight moderation in loan growth and less gains from investment securities.
As at 2.16pm, shares in DBS are trading 89 cents lower or 2.39% down at $36.31, or an FY2022 P/B of 1.6 times and dividend yield of 3.9%, according to UOBKH’s estimates.
