• Finally see positive loan rate and volume dynamics as macro volatility continues to be low and economic recovery gains momentum.
• But as competition heats up, NII will be driven by loans volume growth.
• DBS is likely to outperform in a loans volume led growth as it has the largest amount of cheap CASA to compete with foreign banks for loans in Singapore.
• Upgrade to “Accumulate” rating from “Reduce” rating with a higher target price of S$21.45 (previous TP S$17.92) based on Gordon Growth Model.

What has changed? And why did we upgrade?

In our 2Q17 results, we alluded to unfavourable conditions that can continue to impact DBS’ total income growth – a) less headroom to expand LDR to improve NII b) unfavourable loan volume and rate dynamics caused by rising SIBOR despite economy is weakening. c) Competition in mature markets.

So we had initially thought the positive sentiments and low volatility post Trump Elections will be temporary but as it appears, a sustained synchronous global recovery is gaining momentum. Therefore we could continue to see positive loan rate and volume dynamics in 2H17 and early 2018 that will drive NII higher.

But competition within Singapore housing market remains stiff. For further reading, please refer to our Sept Banking Sector Report.

As competition increase, we expect NII to be led by loans volume growth. Even though DBS has the highest LDR which gives it the least headroom to grow loans faster than deposits, DBS is our top pick because it has the highest Singapore CASA ratio of 91% and the largest overall deposit base of S$342.9bn. This means UOB and OCBC will not be able to lend as much cheap loans as DBS. We believe this is the competitive edge DBS has over its peers against large banks like HSBC and BOC as they begin to compete for loans in Singapore.

Valuation:

3-Year Historical Price-to-Book

Investment Actions

Upgrade to “Accumulate” rating from “Reduce” rating with a higher target price of S$21.45 (previous TP S$17.92) based on Gordon Growth Model.