JP Morgan has maintained “neutral” on DBS Group Holdings D05 with an unchanged target price of $37 as it sees late cycle dynamics limiting the bank’s upside.
Analysts Harsh Wardhan Modi, Daniel Andrew Tan and Gaurav Khandelwal expect DBS to trade in range, with almost the entire return on the stock to come from dividend yields in the next 12 months, aside from limited capital gains from current levels.
In their Feb 21 report, the analysts note that the cost of funds for the bank and sector is moving up, in line with the higher US Federal Reserve (Fed) fund and the Singapore dollar interbank rates. The large gains from lag in deposit repricing is over, they add.
“Management comments during the 4Q briefing suggests that the cost of funds was moving up about 30 basis points for every percent of blended rate increase early last year but has now gone to almost 45 basis points per percent by end of 2022.
“Going forward, if US dollar and Singapore dollar rates do move up, the cost of funds increase can be as high as 60%-65% of incremental. Accordingly, the net interest margin (NIM) increase thesis for DBS is close to over for this cycle,” the analysts point out.
The relation between Singapore dollar and US dollar rates is an important aspect to note in this regard, the analysts highlight. The three-months Singapore swap offer rate (Sor) was moving almost in line with three-months London Interbank Offered Rate (Libor) for most of 2022. However, the two rates diverged in the last three months, with a spread of 97 basis points as at their time of writing.
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These moves have coincided with shifts in Singapore dollar versus US dollar. “Accordingly, even if Fed funds move higher, the path for Sor, Singapore overnight rate average (Sora) and Singapore Interbank Offered Rates (Sibor) is not as clear. Given that DBS has a much better Singapore dollar deposit franchise, it is quite likely that the rate differential will impact NIM dynamics negatively,” the analysts add.
If the US dollar rates move up, the probability of economic slowdown would also move up, leading to a higher likelihood of provisions in 2023 and 2024. This, combined with limited NIM upside is skewing the risk-return trade off for the stock, the analysts say.
While Singapore banks are high-beta plays on global rate and economic outlook, the move from early-cycle to late-cycle dynamics within the next 12 months is causing tough rerating for the stock, despite about 15% RoE for 2023-2025. Had it not been for the end of cycle dynamics, the stock would have reached newer highs on price-to-book multiples, the analysts highlight.
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JP Morgan has a 6.6%-7.6% dividend yield estimate for the stock for the next three years. This is coming from a combination of consistent increase in regular cash dividends as well as specials.
“We forecast a special dividend of 20 cents at the bank in 1HFY2023 results, as the Basel IV related common equity tier 1 release would become clearer by then. This limits immediate downside for the stock, unless asset quality deteriorates meaningfully,” the analysts add.
Among Singaporean banks, JP Morgan continues to prefer OCBC O39 and UOB U11 . According to the analysts, DBS is trading at 1.55x 2023 PB, versus UOB’s and OCBC’s at 1.12x and 1.03 respectively.
As at 10.33am, shares in DBS are trading 13 cents higher or 0.37% up at $34.47.
