Rates rider
Rising rates, strong execution justifies a higher PB
DBS marginally missed 2021 earnings. However, we think this is largely a timing mismatch with NIMs not yet reflecting higher interest rates. The Group’s large, low cost funding base and strong franchise designed to capture regional flows make it a prime beneficiary of rising rates as well as reopening, we believe. We estimate ROEs are set to rise nearly 4ppts above the levels of the past 10-years. This justifies a higher valuation, in our view, especially as risks to dividend payouts are on the upside. We increase TP to SGD41.82, where DBS would trade at 1.7x PB. Maintain BUY.
Higher rates beneficiary
DBS CASA base has increased to 76% of deposits (73% 2020, 59% 2019) giving it a significant low cost funding advantage in a rising rate environment. Even with deposit leakage, Management estimates NII could grow SGD18- 20m per bps of USD rates. A 100bps Fed rate rise could have increased 2021 NII +21%. Current expectations are for 100-175bps of hikes. Our Singapore SORA expectations are for +54bps in 2022E. We forecast 2022E NIMs to rise 18bps YoY vs. 8bps earlier. Conservatively, we expect NIMs to recover to 2019 levels only in 2024E, leaving room for upgrades as the rate cycle becomes clearer. Concurrently, we have raised 2022-23E loan growth by 1-2% to reflect guidance and broader regional re-opening.
Potential for lower allowances, but NPL risk exists
Together with write-backs, overall credit charges fell to 1bps vs. 83bps in 2020. Management expect this level to continue in 2022E, signifying additional write-backs. Credit quality remains benign with NPLs falling to 1.3% in 4Q21 (c. 1.5% 3Q21) with improving recoveries and settlements. Nevertheless, uncertainty on the Chinese economy and rising rates pressuring SMEs are key risks to watch out for going forward, we believe.
Raise TP to SGD41.82. Maintain BUY
We have conservatively raised 2022-23E EPS by 7-8%. Economic reopening, rising rates, increased digitalisation and improving asset quality are all drivers that could support earnings upgrades going forward, we believe. Our multistage DDM (COE 9.3%, 3% terminal) based TP is raised to SGD41.82 (SGD37.03). With 12% upside, maintain BUY. At our TP, DBS would trade at 1.7x PB. Over the next 3-years, the Group’s structural ROE is set to rise 374bps to 14.3% vs. the past 10-years. Therefore, we think a higher multiple is justified. Indeed, pre-GFC, when Group ROEs were closer to 11%, DBS has traded up to 1.8x. Additionally, with three big recent acquisitions to digest, we believe DBS has increased room for higher dividend payouts rather than expending additional capital for growth.