The US Federal Open Market Committee raised the federal funds rate (FFR) by 25bps to 1.75-2% in mid-June. Market expects another two FFR hikes for the rest of 2018, bringing the expected number of hikes in 2018 to four.
Given the historical correlation between the FFR and the three-month SIBOR, analysts expect the latter to maintain its upward trend and this should drive DBS’ NIMs wider.
During the previous FFR upcycle between mid-2003 and mid-2007, DBS’ P/BV rose as high as 1.9x from 1.04x. Currently, the bank only trades at 1.29x 2019F book and our target P/BV is set at 1.47x.
“We are forecasting 2018 NIM of 1.85%, with a further widening to 1.90% in 2019 for the bank (1Q18: 1.83%),” says analyst Leng Seng Choon in its latest report.
Meanwhile, Singapore’s peer-to-peer transfer service, PayNow, is expanding its services to include businesses. This new service, which starts on Aug 13, allows business owners and the Government to link their unique entity numbers to local bank accounts.
This government-led initiative contributing to the growing digitalisation of banking transactions will make banking more efficient in Singapore over the longer term.
“We raise our long-term ROE assumption to 13.6% from 12.9% previously on DBS’ digital strategy and synergies from the Monetary Authority of Singapore-led effects, including PayNow,” says Leng.
RHB is upgrading DBS to “buy” from “neutral” with a new $30.30 target price from $29.60 as it rolls over valuation to 2019F book and raise its ROE assumption.
“Including dividends, the potential total returns are an even higher 18%. Hence, we upgrade DBS to “buy” from “neutral”.
Shares in DBS closed 23 cents lower at $26.38 or 11.4 times FY19F earnings.
