DBS downgraded by CGS-CIMB amid trade war concerns


CGS-CIMB downgraded DBS to Hold from Add on concerns the U.S. trade war with China could spur capital market choppiness and lower loan growth.

Weak market sentiment is likely to weigh on market-driven income, the brokerage said in a note Tuesday.

It noted that the Straits Times Index ended 2018 down 5 percent after the U.S. implemented the initial 10 percent tariffs in September, and added that the tariff increase to 25 percent in May and China’s retaliation could see a similar hit to markets, which would spur a “significant swing” in DBS’ market-related income.

The brokerage said wealth and trading income made up nearly 18 percent of DBS’ total income in 2018.

In addition, CGS-CIMB lowered its loan growth expectations for this year.

“Slower regional growth and weak domestic mortgage activity have already been considered in DBS’s mid-single-digit 2019 loan growth guidance. However, we think that there is downside risk to this figure, and revise our loan growth assumptions to 4 percent from
5.4 percent previously,” the note said. “Risk-off sentiment could weigh more heavily on trade activity this time round as the tariff quantum heightens.”

While the bank saw lower net new non-performing loan formation in the first quarter at S$150 million, down from an average S$274 million a quarter in 2018, this may creep up if business sentiment faces a hit, CGS-CIMB said.

That may mean the earnings impact of continued net interest margin expansion from repricing mortgage interest rates higher could be moderated by potential increases in provisions, the note said.

The brokerage lowered its target price on DBS to S$27.64 from S$30.00.

Shares of DBS were down 0.35 percent at S$25.65 at 11:59 A.M. SGT.

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