Citi Research analyst Tan Yong Hong has kept his “sell” call on DBS Group Holdings with an unchanged target price of $28.70 after the bank saw its fourth service disruption in 2023.
DBS suffered outages to its digital, ATM and payment services — including its credit and debit cards — on Oct 14. The disruption was said to be due to a technical issue at an Equinix data centre, which was used by the bank.
The Monetary Authority of Singapore (MAS) has already imposed an additional capital requirement to the bank for its past outages that took place on November 2021, March 2023 and May 2023 as it is. The additional requirement is equivalent to 1.8x (or around 0.8%) of the bank’s risk-weighted assets (RWA).
The MAS has yet to respond to the disruptions from DBS that took place in September and October 2023.
“[This] may include a broad range of penalties including additional capital charge and/or fines among others,” writes Tan on Oct 15.
Based on analysts’ transcripts for the 2QFY2023, DBS’s baseline dividends per share for FY2024 is at $1.92 or 48 cents per quarter. For the FY2023, Tan is expecting DBS to post a total dividend per share of $2.12. The figure includes a higher quarterly dividend of 54 cents plus a special dividend of 20 cents in the 4QFY2023. The overall figure translates to a 6.3% yield.
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However, these estimates could be at risk depending on the extent of any potential additional capital charge, Tan notes.
Following the latest outage, Tan sees three possible implications faced by the bank.
First, DBS may see reduced excess capital. “Assuming if the MAS adds another 0.3x/0.6x operational RWA charge, excess capital is reduced to $2 billion/$1 billion (DBS’s digital day 2023: $3 billion).”
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“On a proforma basis, DBS Common Equity Tier 1 (CET-1) ratio [will] fall to 13.8%/13.6% respectively under these scenarios. This excludes [a] 0.5% percentage point (ppt) impact from [the] completion [of its acquisition] on 3Q2023,” he adds.
Second, the bank may suffer from reputation risk, especially to its 86% current account savings account (CASA) ratio with the POSB franchise.
Finally, Tan notes that the bank may have to plan for higher operating expenses (opex) to ensure business continuity.
On the whole, all three Singapore banks could be favoured over Singapore REITs (S-REITs) currently due to upside pressure on debt cost from debt refinancing, EFR (or exchange for risk) risk given growth ambitions for assets under management (AUM), high gearing and cap rate expansion for the latter.
That said, Tan’s current cautious view on the sector is premised on a US recession happening in 2024 and hard landing expectations. In this case, Singapore banks should underperform on an absolute basis, he writes.
Within the three banks, Tan continues to prefer Oversea-Chinese Banking Corporation (OCBC) over DBS due to its “defensive” 6.4% dividend yield, excess capital buffer and possible net interest margin (NIM) expansion in the 3QFY2023 and earnings growth from credit cost normalisation, which could drive expectations for a higher dividend in 2HFY2023.
“Recall that OCBC ran [a] 4% fixed deposit (FD) campaign in December 2022/January 2023 with eight months tenure which should reprice down in 3QFY2023 to [a] current rate of 2.7%,” says Tan.
As at 11.03am, shares in DBS are trading 33 cents lower or 0.98% down at $33.44.
