RHB has maintained DBS at “buy” with a higher target price of $30 from $25.20 previously as the brokerage’s research team believes the bank is on its way to a sustained return on equity (ROE) recovery in FY2021-FY2022F.
The team has also maintained its earnings forecasts for the FY2021F and FY2022F.
“Aside from lower credit costs, the pick-up in economic activities will underpin continued improvements in fee income growth and loan demand. Strategies to manage excess liquidity and deposit repricing should also help support net interest income (NII),” says the team.
“The acceleration in digital adoption, spurred by Covid-19, also places DBS ahead of peers. At 1.05x FY21F P/BV against ROE of 9.5%, the current valuation remains compelling,” it adds.
The team is also positive on the bank’s high provision buffers as it allows it more headroom to absorb any potential losses from credit risks compared to its peers.
“With provisions of $2.49 billion set aside in 9MFY2020, that included adjustments for macroeconomic variables (MEV) and management overlay, management has front-loaded much of its 2-year provision guidance of $3-5 billion,” notes the team.
“Its loan loss reserve (LLR) was increased to 107% at end Sept 2020, compared with 94% in Dec 2019. We believe DBS’s provision buffers are sufficient, when put up against the 5% of loans under relief programmes,” it adds.
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Other positives to the bank include sustained improvement in DBS’s fee income from wealth management and customer treasury flows. This comes as the bank reported a rebound in its fee income by 17% q-o-q to pre-Covid-19 levels.
The bank’s management also guided that the bank can achieve double-digit fee income growth in FY2021F.
DBS’s common equity tier-1 (CET-1) is at a comfortable 13.7% and should safeguard dividend prospects, adds the team, who project distributions per share (DPS) to rise to 90 cents in FY2021F from 74 cents in FY2020F.
As Singapore’s short-term interest rates are expected to stay low for longer, prospects of a net interest margin (NIM) recovery could be dampened.
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The bank expects NIM to ease to 1.4-1.5% compared to 1.53% in 3QFY2020 and 1.89% in FY2019.
“To prop up NIM, the bank is working to manage the excess liquidity built up from robust deposit growth, and reprice deposits lower. Overhead expenses will also be tightly controlled, to improve operating leverage. On a positive note, management believes loans will grow by a mid-single digit in FY21F, vs the annualised 4.3% growth in 9MFY2020,” it says.
As at 12.36pm, shares in DBS are trading 13 cents higher or 0.5% up at $25.59.
