Brokers' take: Analysts cut target prices for DBS on expectations of weaker FY20

Published Fri, Feb 14, 2020 · 07:52 AM

ANALYSTS this week lowered their price targets on DBS Group, which may signal similar cuts in target prices for Singapore's other two banks after they report financial results next week.

DBS on Thursday said it expects a 1-2 per cent dip in revenue this year amid the novel coronavirus (Covid-19) outbreak. That, coupled with a benign interest rate environment, has led analysts to lower their price targets on South-east Asia's largest lender.

In a Thursday report, CGS-CIMB analysts Andrea Choong and Lim Siew Khee wrote: "We expect the bulk of year-on-year net interest margin (NIM) compression to take place in the first half of FY2020 as declining funding costs catch up to falling yields."

CGS-CIMB forecasts DBS's NIM to narrow by 6 basis points on the year to 1.83 per cent in FY2020.

NIMs are a key gauge of profitability for banks, measuring the difference between income earned from loans and the interest paid to depositors.

Jefferies Singapore analyst Krishna Guha is also "a bit more cautious" of DBS's margins for FY2020. He expects a FY2020 NIM of 1.8 per cent because "the Singapore interbank offered rate (Sibor) may soften and there may be some temporary payment discontinuity".

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As for loan growth, DBS said on Thursday that it is maintaining its "mid-single digit" guidance for FY2020. However, some analysts believe the lender is likely to register a lower rate than that.

RHB Research analyst Leng Seng Choon said: "We forecast FY2020 loan growth of a softer 1 per cent as businesses slow their loan demand amid a slowing economic environment."

Meanwhile, CGS-CIMB's Ms Choong and Ms Lim are also more conservative and expect a 3 per cent loan growth, "given the sequential revision to regional GDP due to the Covid-19 outbreak".

With DBS offering six-month principal payment moratoriums for SME and consumer property loans amid the novel coronavirus outbreak, credit charges are expected to increase in FY2020, noted Maybank Kim Eng analyst Thilan Wickramasinghe.

This is also likely to be the case for the Republic's other two banks.

"Read-throughs from DBS's Q4 FY19 results imply potentially higher credit costs at OCBC Bank and United Overseas Bank (UOB), depending on their consumer segment exposure," said the CGS-CIMB analysts.

OCBC on Thursday also rolled out its virus relief package, offering targeted support to customers across its core markets affected by the outbreak. These markets include Singapore, Malaysia, China, Hong Kong and Macau.

OCBC's measures include allowing customers to restructure their loans and providing a moratorium on principal repayment for loans.

Meanwhile, UOB on Wednesday said it has set aside S$3 billion to provide companies in Singapore with assistance to tide over the negative impact of the Covid-19 outbreak on their business.

On Thursday, DBS posted a 14 per cent increase in Q4 net profit to S$1.51 billion, on the back of broad-based business momentum, a notch higher than market expectations. DBS' total income increased 7 per cent on the year to S$3.46 billion from loan growth and a double-digit improvement in fee income.

The lender also announced a quarterly dividend of S$0.33, taking total payout for FY2019 to S$1.23. Annualised dividends stood at S$1.32.

While earnings forecasts were revised downward after DBS's Q4 earnings, research houses believe Singapore's largest lender is able to sustain its dividend payouts to shareholders in FY2020.

Maybank Kim Eng's Mr Wickramasinghe estimated that this will only require a 53 per cent payout ratio, which together with DBS's "strong" Common Equity Tier 1 ratio of 14.1 per cent suggests the bank is in a "comfortable positon to deliver strong, defensive dividend visibility".

Maybank Kim Eng maintained its "buy" recommendation on DBS with the price target lowered to S$28.60, from S$29.92 previously. Jefferies has a "buy" call and price target of S$28.50, down from S$31. CGS-CIMB reiterated its "add" call with target price of S$27.09, down from S$28.29.

Meanwhile, RHB Research kept a "neutral" call on DBS with a target price of S$24.80, versus S$25.80 previously.

As at 3.59pm on Friday, DBS shares were trading at S$25.50, up S$0.08 or 0.32 per cent.

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