DBS: Buy, it's an Asia Super Ten stock

Excerpts from analysts' report

HSBC Global Research analysts: Kar Weng LOO & Ashish Khare

Photo: DBSBuy: Punished unjustly  » Hit by weak sentiment and caution on NIM and loan growth  »  EPS forecasts lowered 2-6%; cut TP to SGD23.6 from SGD25  »  Not as bad as it seems. Still our preferred pick; reiterate Buy, an Asia Super Ten stock

Hit badly. DBS has fallen 18% from its SGD21.43 peak on 21 July. The sell down was more pronounced after its 2Q15 results on 27 July and the renminbi fixing regime adjustment on 11 August. While the weakness is partly due to overall market caution, there are also stock-specific factors. Specifically, DBS was a ‘crowded trade’ in the Singapore market.

We have argued before that this in itself may not be sufficient to trigger stock price weakness (Better earnings momentum in 2015e, 26 January). A negative catalyst was also required to trigger weakness. For DBS, this came in the form of slowing credit growth and NIM possibly peaking, which was the message in its 2Q15 briefing (Returns matter more than asset growth, 27 July). We believe the market took this to mean that the risk of earnings disappointment has increased.

Let’s assess the situation. At this juncture, we would say that it is not as bad as it seems. It is true that loan growth is coming in lower than initially expected at the start of the year but NIM is still significantly higher than a year ago. We would be much more concerned if DBS were lending aggressively in such volatile economic conditions. Also, after the renminbi adjustment, the SGD NEER is now hovering near the bottom of its band while the Swap Offer Rate and 3-month SGD SIBOR have started trending up again. All this should provide some support for the NIM outlook in 4Q15e and beyond.

Tweaks to EPS forecasts. We cut our EPS forecasts by 2-6% after lowering our loan growth to 5% from 10% in 2015e and 8% from 10% in 2016e and 2017e. Everything else is constant as we are still very comfortable with our NIM and asset quality outlook. In line with our new forecasts, we cut our target price to SGD23.60 from SGD25 to reflect a lower 12% sustainable ROE (previously 12.6%), a lower 2.4% long-term growth rate (previously 4%) and a BVPS of SGD17.50 based on Dec 2016e (previously SGD16.10 on Dec 2015e). Our new target price implies 1.3x Dec 2016e BV and 12x 2016e EPS.

Still our preferred stock. We think the recent price weakness is an opportunity to buy into one of the best banks in the region. At 1x Dec 2016e BV and 9x 2016e EPS, DBS is trading below its average PB and PE multiples. It also offers a 2015e cash dividend yield of 3.6%. We believe the stock will re-rate when concerns of earnings disappointment are put to rest.