Brokers’ take: Analysts cut DBS targets amid expectations of NIM moderating

ANALYSTS on Wednesday (May 3) lowered their target prices on DBS, with RHB downgrading the counter to “neutral” from “buy”.

The move came after DBS lowered its FY2023 guidance on loans and fee growth, net interest margins (NIMs) and treasury income amid a softer outlook.

In a report, RHB cut its target price on the lender to S$35.70 from S$39.80, implying a potential upside of 10.7 per cent from the counter’s trading price of S$32.24 as at 3.42 pm. DBS shares were down 2.2 per cent or S$0.71 at the time.

The drop in target price came after the research team lowered its FY2023-25 earnings estimates by between 5 per cent and 6 per cent after factoring in the lower NIM, loan growth and fee income.

“Although FY2023 return on equity is projected to rise to 17 per cent, we believe its share price may be capped in the near term by concerns over the downside risk to earnings,” said RHB.

It expects the decline in NIM to be gradual as 22 per cent of its commercial bank interest-bearing assets have yet to be repriced.

Meanwhile, CGS-CIMB maintained “hold” on the stock and trimmed its target price to S$35.30 from S$35.70, implying a potential upside of 9.5 per cent.

The research team lowered its earnings-per-share forecast for FY2023 to FY2025 by between 1 per cent and 7 per cent as it expects lower NIM and loan growth estimates.

In a separate report, UOB Kay Hian (UOBKH) lowered its target price on DBS to S$41 from S$41.80, while maintaining its call to “buy”. The new target price is 1.88 times the brokerage’s FY2023 book value forecast for the lender.

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UOBKH had trimmed its earnings forecast by 1.5 per cent for FY2024 due to the moderation in NIM, which was offset by improved cost efficiency. That being said, it expects the NIM decline to be gradual and projects full-year NIM to be between 2.05 per cent and 2.1 per cent, in line with DBS management’s guidance.

Looking ahead, both UOBKH and CGS-CIMB expect a short-term positive impact from Basel IV, the latest set of capital requirements for banks globally.

The research groups believe that the implementation of Basel IV, starting Jan 1, 2024, will improve DBS’ CET-1 CAR by two percentage points.

The improvement would give DBS a short-term boost during the five-year transitional period, said UOBKH analyst Jonathan Koh. But he noted that the improvement will be eroded over time as the output floor is calibrated higher during the transitional period.

CGS-CIMB analyst Andrea Choong believes the implementation of Basel IV will allow the bank the option of not replacing its Additional Tier-1 securities, which have S$1 billion and US$1 billion issuances outstanding, with call dates in 2025.

“With its Common Equity Tier 1 ratio of 14.4 per cent being above its targeted 12.5 per cent to 13.5 per cent range, capital management plans may unlock dividend per share review,” she said.

Shares of DBS were trading down 2.1 per cent or S$0.70 at S$32.25 as at 4.22 pm on Wednesday.