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DBS kept at 'buy' by Phillip as lender goes all out on digital banking

PC Lee
PC Lee • 2 min read
DBS kept at 'buy' by Phillip as lender goes all out on digital banking
SINGAPORE (Nov 27): Phillip Capital is maintaining its “buy” on DBS Group Holdings with a higher target price of $29.83 as DBS goes all-out to embrace digital banking.
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SINGAPORE (Nov 27): Phillip Capital is maintaining its “buy” on DBS Group Holdings with a higher target price of $29.83 as DBS goes all-out to embrace digital banking.

According to Phillip, digital capabilities should continue to improve DBS’ cost to income ratios in established markets. In addition, digitally engaged clients have higher transaction volumes and therefore more profitable than non-digitally engaged clients.

“Expect stronger than expected performance at digibank India in 2018,” says analyst Jeremy Teong in a Monday report, “we increase FY18e PATMI by 8.4% to $6.2 billion.”

DBS’ Investor Day main theme was digital strategy and how it is applied to different markets to drive the bank forward.

DBS is adopting the digital platform approach to engage their customers and digitising their banking processes. The aim is to pre-empt new digital disruptors in the legacy markets where DBS is an incumbent.

Teong says the digital process reduced the cost to income ratio from 49% in 2015 to 43% in 2017 as income growth outpaced cost growth and ROE improved from 22% in 2015 to 24% in 2017. DBS aspires to improve the cost-income ratio further to less than 40%.

In addition, DBS is using the digital approach to acquire clients at a low cost and achieve scale in product distribution.

The aim is to disrupt the banking incumbents in the growth markets that have large swathes of physical branches. Fighting head-on with physical branches in these growth markets would be uneconomical and less effective.

“Income from Consumer & SME banking in growth markets including India and Indonesia is expected to grow 20% CAGR,” says Teong.

Meanwhile, DBS’ private banking and cash management has also experienced higher transaction turnover as digital platforms keep clients engaged and client-initiated transactions increase.

Phillip has increased his DBS ROE expectation for FY18E from previous estimate of 12.1% to 13.1% as the economies in DBS’ main markets of Hong Kong and Singapore remain vibrant. In particular, Singapore 3Q GDP growth surpassed expectations with a 5.2% increase y-o-y.

“Our revised ROE estimate is due to our expectation that the strong economy continues to be supportive of stronger pass-through of higher interest rates,” says Teong.

As a result we increased our FY18E total income estimate by 4.5% and PATMI estimate by 8.4%. The high double digit growth in FY18e PATMI is mainly due to absence of lumpy provision expense in FY17.

As at 12.36pm, shares in DBS are down 21 cents to $24.79 or 10.2 times FY18 forward earnings.

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