RHB: DBS earnings to face squeeze if Fed cuts rates again

DBS ATM in SingaporeDBS ATM in Singapore

DBS’s net interest margin (NIM) is set to narrow in the quarters ahead, pinching earnings, since Southeast Asia’s largest bank is the most sensitive among Singapore’s three banks to changes in SIBOR, RHB said in a note Friday.

SIBOR tends to be positively correlated to the U.S. federal funds rate, which the market widely expects will be cut once again at the Federal Reserve’s next meeting on 17-18 September, the brokerage said, adding there could be another cut at the October meeting as well.

During DBS’s second-quarter results briefing, the bank expects third quarter NIM, or the difference between the interest rate banks charge to lend and their cost of funds, to narrow by 1 basis point on-quarter, and then by another 1-2 basis points in the fourth quarter, RHB noted.

The brokerage said it was forecasting the bank’s NIM would be 1.86 percent in 2020 and 1.84 percent in 2021, down from 1.91 percent in the second quarter.

In addition, DBS’s high percentage loan exposure to Greater China isn’t a positive currently, the note said. Around 29.9 percent of DBS’s loans are to Greater China, compared with OCBC’s 24.2 percent and UOB’s 15.7 percent, the note said.

“With the current trade war between the U.S. and China adversely affecting China’s economic growth, DBS’ larger percentage exposure is not a positive, as there is a risk of higher [non-performing loans] from the economic slowdown,” RHB said.

The concerns spurred RHB to lower its target price to S$25.30 from S$28.30, while keeping a Neutral call.

It tipped its top Singapore bank pick as UOB.

Shares of DBS ended Friday at S$24.76, up 0.53 percent.

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