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Brokers' take: CIMB, UOB maintain 'buy' on continued promise of DBS's digital transformation

UOB Hay Kian and CIMB have maintained "buy" calls on DBS citing the positive reception of its continued digital transformation and the bank's financial goals announced during its investor day held last Friday.

UOB has raised its target price from S$24.40 to S$26.10 - a 6.9 per cent increase from its current valuation, while CIMB maintained its target price of S$25.

The brokers are also maintaining coverage as DBS has shown its ability to measure the financial performance of its digitalisation efforts.

"Just based on digitalisation, we believe that the bank would be able to achieve return on equity (ROE) of between 13 and 14 per cent in the next three to five years which does not include upside from Fed rate normalisation," CIMB said.

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The brokers also highlighted DBS's digital transformation was comprehensive.

"It entails re-architecting its technology, insourcing its technology, launching the world's largest banking application programming interface (API) platform, sharpening its customer focus and most importantly, changing the culture by transforming the bank into a 22,000 person startup," CIMB said.

In addition "DBS's focus on digitalisation probably means that it would not undertake large-scale M&As (mergers and acquisitions) in the near to mid-term as that would divert the management's attention," CIMB added.

However, brokers at UOB have warned that DBS may continue to face competition from digital giants such as Google, Facebook and Alibaba, primarily due to their huge customer base, cost efficiency and ability to scale.

With regard to its financial goals, DBS has issued targets to grow its consumer & small and medium-sized enterprise (SME) businesses in Singapore and Hong Kong with management targets to increase contributions to income from 44 per cent in 2015 to 50 per cent over the next five years, the brokers from UOB said.

The management of DBS has also targeted to increase contributions to income from consumer and SME businesses in growth markets - from 4 per cent in 2015 to about 10 per cent, representing five-year compound annual growth rate of above 20 per cent and eventually achieving an ROE of above 10 per cent.

However, UOB cited there is a lack of physical distribution in its consumer & SME businesses in growth markets - China, Taiwan, India and Indonesia, which contributed to only S$18 million or 0.4 per cent of group net profit for 2014.