DBS upgraded to Buy by RHB despite higher exposure to Greater China loans

DBS ATM in SingaporeDBS ATM in Singapore

RHB upgraded DBS to Buy from Neutral, pointing to a “golden opportunity” from rising net interest margins (NIM), despite the bank’s potential exposure to the U.S.-China trade war.

“Recent concerns over the U.S.-China trade war has led to DBS’ share price falling 8 percent over the past one month, more than factoring in its loan exposure to Greater China,” RHB said in a note last week. It noted that DBS’ loan exposure to Greater China is at 32 percent, higher than its two peers’ average of 20 percent.

But the brokerage noted that the rising U.S. federal funds rate trend “remains intact,” with market expectations for another two rate hikes from the Federal Reserve in the second half of this year, with further hikes expected in 2019.

The federal funds rate and the three-month SIBOR, the rate hikes have historically been correlated, which should drive DBS’ NIM up, it said. It forecast its 2018 NIM at 1.85 percent, before widening to 1.90 percent in 2019, compared with 1.83 percent in the first quarter.

RHB raised its target price for DBS to S$30.30 from S$29.60 after rolling over valuations to 2019 estimates from 2018, indicating a forecast potential upside of around 18 percent, including dividends.

Shares of DBS ended Friday up 0.45 percent at S$26.61.

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