DBS Group Holdings

DBS Group Holdings | Neutral Target price: S$27.00

March 15 close: S$28.61

RHB Research, March 15

Three indicators point to more Sibor (Singapore Interbank Offered Rate) upside. The market is expecting the Federal Funds Rate (FFR) to be hiked 3-4 times this year. Currently, the spread of the London Inter-bank Offered Rate (Libor) over Sibor is 73 basis points – sharply wider than the 47 basis points historical average over 15 years. If we assume a reversion to mean, there is scope for the three-month Sibor to trend up further.

Thirdly, the Monetary Authority of Singapore's (MAS) April monetary policy statement will likely keep monetary stance unchanged. This means that Sibor is likely to trend up, in line with the FFR hikes. We are forecasting DBS' NIM (net interest margin) for 2018, 2019 and 2020 at 1.82 per cent, 1.88 per cent and 1.96 per cent respectively. This is an uptrend versus 2017's 1.75 per cent. The trend of rising Sibor would contribute to this uptrend.

Given the likelihood of a more aggressive tightening of US monetary policy, we raised our DBS average ROE (return on equity) assumption over the next few years to 12.7 per cent from 12.1 per cent previously. Our COE (cost of equity) assumption remains at 10 per cent. This yields a target FY18F price to book value (P/BV) of 1.39 times – higher than the five-year historical average of 1.15 times. Correspondingly, our target price is raised to S$27 (from S$25) on an ex-dividend (on May 3) basis. Although DBS is likely to gain from Sibor increases, we believe the positives have largely been priced in. This is evident from the 50 per cent plus share price rise over the past 12 months. Downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs. The converse represents upside risks.

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