DBS Group Holdings Ltd: Expect More Acquisitions to Boost Growth January 16, 2017

PSR Recommendation: NEUTRALStatus: MaintainedTarget Price: 16.85
  • High Loan to Deposit Ratio (LDR) provides little room for DBS to manage its net interest income growth.
  • Customers’ loans would be affected by strengthening USD.
  • More dependent on bolt on acquisitions to grow net interest income.
  • Downgrade to “Neutral” with a higher target price of S$16.85 (previously S$15.71), pegged at unchanged 0.95x FY17F book value (excluding perpetual capital securities).

Expect lacklustre loans and net interest income growth.

DBS’ 3Q16 LDR of 89.5% is at the highest since 2008 and is the highest amongst the 3 Singapore banks. We opine that owing to the high LDR, DBS has little headroom to stretch the ratio higher to boost net interest income growth. The high LDR would also leave DBS more susceptible to increasing competition for deposits amid rising interest rates. DBS’ USD Customers Loans (which makes up 33% of the total Customers Loans) is vulnerable to the strengthening of USD. For further reading, we refer to our Singapore Banking Sector report titled “Challenges to loans and net interest income growth”.

More dependent on bolt on acquisitions to grow net interest income.

Owing to DBS’ high LDR, we expect acquisitions to be the next quick way to bolt on loans and deposits in order to grow net interest income. At the same time, acquisitions are cost effective way for DBS’ Wealth Management business to gain access and upsell to a ready client base. In contrast, organic growth through establishing new branch networks would be more expensive and slow to accrue benefits. In 2017, we believe DBS will be front-footed in seeking out strategic acquisitions from multinational universal banks which are looking to exit businesses in Asia.

Operating trends expected in 4Q16.

We expect 4Q16 PATMI to be S$1.08bn (+0.84% q-o-q, +7.78% y-o-y), boosted primarily by a strong y-o-y growth in Net Fee and Commission Income. We expect negative y-o-y net interest income growth as unfavourable loans/deposits rate and volume dynamics persists while benefits from acquisition of ANZ’s wealth management and retail banking business in Singapore, Hong Kong, China, Taiwan and Indonesia would only accrue after 2Q17.

Investment Actions

We expect DBS’ strong non-interest income performance to be offset by a weak net interest income performance. At the same time, we see its overall upside limited to the small opportunities to find similar acquisition targets like ANZ’s wealth management and retail banking business in the Asian markets that could add significant deposits and loans growth. Downgrade to “Neutral” with a higher target price of S$16.85 (previously S$15.71) as we roll over to FY17F valuation. Our new target price is based on unchanged 0.95x FY17F book value (excluding perpetual capital securities).

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About the author

Profile photo of Jeremy Teong

Jeremy Teong
Investment Analyst
Phillip Securities Research Pte Ltd

Jeremy covers primarily the Banking and Finance sector. He has 6 years’ experience in equities related dealing and research roles.

He graduated with Bachelors of Mechanical Engineering from Nanyang Technological University.

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