Tan’s “sell” call comes on the back of risks to the bank’s net interest income (NII) as its average interest earning assets (AIEA) could fall below the consensus estimate of $653 billion for FY2023, which is up by 5% y-o-y.
In the 1QFY2023 ended March 31, DBS’s AIEA stood at $617 billion, down 4% q-o-q.
Loan growth risk is another downside factor for Tan as he sees the bank’s loans from Greater China (making up about 30% of the bank’s total loans) remaining soft with onshore lending rates still low.
Finally, DBS’s superior return on equity (ROE) to its peers could narrow on higher taxes and provisions as well as a reversal in a $5.2 billion swing in fair-value reserves, which lifted the bank’s FY2022 ROE by 67 basis points (bps).
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In spite of the negatives, the analyst has recognised DBS’s early digital transformation and its focus on shareholder returns.
That said, he is proposing investors conduct a “pair trade” between DBS and Oversea-Chinese Banking Corporation (OCBC), with investors underweighting DBS and overweighting OCBC.
“OCBC’s earnings have [a] lower risk. Its 1QFY2023 AIEA was closer to FY2023 cons and its Greater China loans are a smaller share of the total,” says Tan.
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He adds: “OCBC could positively surprise on [its] 1HFY2023 dividend per share (DPS), based on a 50% payout ratio plan and targeted 14% common equity tier 1 (CET-1) ratio plus ongoing risk-weighted assets (RWA) optimisation.”
With its share price trading at below 1x P/B, OCBC offers valuation support, in Tan’s view.
That said, Tan is also remaining “neutral” on OCBC with a higher target price of $12.50 from $12.20 previously.
“In a global downturn or recession, Singapore suffers given its large exposure to developed markets. DBS and OCBC tend to suffer and lose any premium over 1x P/B,” he writes.
“In the past two downcycles, DBS / OCBC valuations fell to 0.8x P/B. With OCBC currently trading below [its] book value, we believe it has downside support. Our economists forecast a US recession in 4Q2023-1Q2024,” he adds.
Shares in DBS and OCBC closed at $31.25 and $12.38 respectively on June 12.
