Daiwa: DBS stock price tug-of-war between rising rate clarity and macro uncertainty

DBS ATM in SingaporeDBS ATM in Singapore

The “listless” performance of DBS shares is a standoff between macro-economic risks in emerging markets and prospects for interest rate hikes, Daiwa said in a note this week.

“As the macro-related risks are still unclear and mostly unquantifiable, in our view, we give more weight to the firm outlook for rising interest rates as they remain a key driver for DBS’s profitability,” Daiwa said.

It kept an Outperform call on the stock, but lowered its target price slightly to S$29.00 from S$30.00.

Macro risks real…

But the investment bank noted there were risks for DBS from depreciating currencies in India and Indonesia, although it said that the two countries were less than 8 percent of total credit risk as of the end of last year, and less than 3 percent of pre-provision operating profit.

However, “any prolonged downturn in these markets would constrain the longer-term growth potential of the income streams from these operations,” it said.

Daiwa also said there were concerns over the health of the Chinese economy, complicated by the U.S. trade war and the government’s efforts to deleverage without hurting the economy or the exchange rate.

DBS’s exposure to greater China, excluding Hong Kong and including Taiwan, was around 17 percent of total credit risk as of the end of last year and 6 percent of pre-provision operating profit, Daiwa said.

“Although the exposure is not small, it is not clear now how a sharply deteriorating Chinese economy (even if this tail risk transpires) would affect DBS’s credit exposures or business profitability,” it said.

But rising-rate scenario playing out

Despite the macro risks, Daiwa said that the expectation for rising interest rates over the next one to two years has strengthened this year, amid U.S. employment growth and Federal Reserve interest rate hikes.

“Since DBS’s earnings are positively correlated and one of the most sensitive to rising rates (three-month SIBOR and SOR) in Singapore, we
believe DBS’s earnings per share growth (2018E year-on-year and three-year compound annual growth rate) will not only be one of the
strongest but also one of the most defensive in the market,” Daiwa said.

It noted that SIBOR and SOR, the key rates for Singapore-dollar lending, have increased steadily so far this year and appeared set to hit Daiwa’s 2018 forecast of 1.5 percent for the three-month SIBOR, up 44 basis points than 2017’s average.

Possible oil and gas recoveries

Daiwa said another potential boost for DBS could come from the possible revival of Swiber Holdings, which has been in judicial management since 2016, and which could see an equity injection of US$200 million; DBS took a provision charge of S$400 million for exposure to Swiber, it said.

“Any significant recovery from Swiber or from any other OGSS bad loans would be a positive surprise and bolster DBS’s capital position and capacity to pay more dividends,” Daiwa said.

Shares of DBS ended Wednesday down 1.23 percent at S$24.95; the STI ended down 1.11 percent.

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