Brokers’ take: RHB cuts DBS target by 7.6% amid weak earnings outlook
Daphne Yow
RHB Research has cut its target price for DBS by 7.6 per cent to S$33 from S$35.70, but maintained its “neutral” call on the stock, it said in a report on Friday (Jun 23).
The drop in target price came after RHB cut its FY2024 and FY2025 earnings forecast by 9.6 per cent and 11.6 per cent, respectively, due to a poor economic outlook.
RHB’s economists expect Singapore’s gross domestic product for the second quarter to contract by 1.4 per cent year on year, with increased risk of a technical recession in the first half of the year. On Jun 16, data from Enterprise Singapore showed that the Republic’s non-oil domestic exports fell by an unexpectedly higher 14.7 per cent year on year in May.
RHB believes that businesses will remain cautious early into 2024. Its lower earnings forecast assumes lower net interest margins (NIMs) for DBS, marginally higher credit costs and an increased effective tax rate.
The research team now expects net profit to fall by 3 per cent year on year for FY2024, before rising by 4 per cent on the year for FY2025. Its FY2023 earnings estimate remains the same, bolstered mainly by a still-healthy NIM.
RHB also believes that the Singapore bank’s share price will be range-bound in the near term. Shares of DBS were 1.2 per cent lower at S$31.43 at market close on Friday.
The new target price is based on a price-to-book value ratio of 1.4 times, which is one standard deviation above DBS’ historical mean, against a return on equity of 15.6 per cent.
DBS’ recent S$2.6 million penalty for money-laundering rule breaches uncovered in a Wirecard probe also highlighted the bank’s “operational shortcomings”, even though the impact on earnings is immaterial, RHB noted.
On Wednesday, the Monetary Authority of Singapore fined DBS, OCBC, Citibank and insurer Swiss Life (Singapore) for breaches between July 2015 and February 2020 in relation to 11 corporate customer accounts. DBS’ penalty was the largest.
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