Shares in DBS came close to reaching the $40 mark on Sept 23. At around midday, the bank’s shares hit a record price of $39.70 before closing at $39.46. After reaching all-time highs, shares in the bank have been on a steady decline since. On Sept 26, DBS’s shares opened at $38.03, 0.89% lower than its last-closed price of $38.37.
On Sept 24, OCBC Investment Research (OIR) strategist Carmen Lee noted DBS’s strong price outperformance, as the bank gained some 30% year-to-date (ytd), far surpassing the benchmark Straits Times Index (STI) and other high dividend stocks.
The outperformance came despite general market expectations of further rate cuts, potentially impacting the bank’s net interest income (NII) and net interest margin (NIM). The US Federal Reserve announced a 50 basis point (bps) rate cut on Sept 18.
In Lee’s view, DBS’s “attractive” annual dividend yield of 5.5% will continue to support its share price in a low-rate environment. The bank has an estimated annual dividend payout of $2.16, or 54 cents per quarter.
She writes that even if the bank reverts to its 10-year historical average yield of 4.4%, it is still a good yield.
To be sure, DBS’s yield surpasses the recent Singapore six-month T-bill, which closed at a cut-off yield of 3.1% as at its auction date of Sept 12.
“On average, most six-month issues in 2024 were at least two times subscribed with about an average of $14.9 billion applied per issue,” Lee points out. “Assuming this goes back to the pandemic average of $9.6 billion per issue when cut-off yield was an average of 0.9% in 2020, there is still about $5 billion looking for better yields in the Singapore dollar (SGD) market.”
With DBS’s shares trading very close to Lee’s fair value estimate of $39.83 (as at her report), the analyst remains “fairly comfortable” about the bank’s dividend payout for this year.
“Looking ahead, further Fed rate cuts will put pressure on NIM in 2025 and beyond, and this will be partly mitigated by better outlook for loans and other fee income,” she writes.
See also: MAS Financial Stability Review shows local banks can withstand multiple shocks
Lee has a “hold” call on DBS.
Morningstar equity research analyst, Michael Makdad still sees DBS’s shares to be “moderately undervalued” should the bank reach the $40 mark, noting that the firm raised its fair value estimate to $44 from $43 in early August.
In Morningstar’s Aug 8 report, analyst Lorraine Tan said that the higher fair value estimate was due to a higher forecast of 15% for DBS’s net fee income growth in FY2024, up from 6% previously.
“Net fee income increased by 27% y-o-y in [2QFY2024], driven by a 37% rise in wealth management fees (25% excluding the Taiwan business acquired from Citi) and a 32% increase in credit card fees (up 9% excluding Citi),” she wrote at the time. “The strength in fee income growth from the first quarter, when net fees rose by 22%, not only continued but also accelerated in the second quarter.”
At the time, DBS also announced the appointment of Tan Su Shan as its deputy CEO. Tan will succeed longtime CEO Piyush Gupta in March 2025 when he retires.
“Given the extended transition period and Tan’s extensive experience working with Gupta for 14 years at DBS (and before DBS at Citi), we view Tan as a continuity candidate,” said Tan in her report.
“While we expect that Gupta is likely to give Tan time to shape her own plans for DBS's future capital allocation, we believe there is potential for an increase in shareholder distributions before Gupta’s departure if DBS continues to deliver strong results,” she adds.
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A research analyst from RHB Bank Singapore sees DBS to be “fairly valued” from a P/BV basis should its shares reach $40. At that level, the bank would be trading at a FY2025 P/BV of 1.67 times, or +2 standard deviations (s.d.) from its long-term mean.
“However, we think it is possible that investors may be seeking stocks with qualities such as attractive dividend yields and defensive earnings to help tide through potential market volatilities ahead. We believe DBS is one such stock,” says the analyst.
Bloomberg Intelligence credit analyst Rena Kwok sees “limited room” for DBS’s dollar bonds’ substantial spreads tightening at their current levels.
“Further upside potential for DBS's FY2024 earnings may be capped by market expectations of further interest rate cuts,” she says. At the same time, Kwok sees that asset-quality pressures would remain “benign” despite the bank’s exposure to some commercial real estate risks in overseas markets."
Citi Research analyst Tan Yong Hong has kept his “sell” call and target price of $31.90 despite the street’s optimistic expectations that have factored in DBS’s latest wealth ambitions for 2027.
In a Straits Times article, DBS said it aims to double its wealth management fees from $500 billion in assets under management (AUM) in 2023 by 2027.
To Tan, the bank’s AUM targets are in line and implies a compound annual growth rate (CAGR)of 8% from FY2023 to FY2027. Citi has estimated the bank’s wealth CAGR to be at 8% from FY2023 to FY2026, compared to the consensus estimate of 12% CAGR.
“Even if wealth fees double ($1.51 billion to $3.01 billion in FY2027), and AUM growth +8% FY2023 – FY2027 CAGR ($365 billion to $500 billion), that implies heightened market optimism (wealth churn 47 bps to 63 bps in FY2027),” Tan writes.
“Assuming that comes true, that also implies non-wealth fees income growth at +8% FY2023 – FY2027 CAGR, based on consensus expectations,” he adds, noting that DBS’s fee income from non-wealth grew by a CAGR of 4% from FY2017 to FY2023, including the integration of Citi Taiwan in 2023.
“Based on these, consensus expectations have more than captured DBS wealth ambitions, in our view,” says Tan.
Given the “flat” earnings profile between FY2024 and FY2027, Tan is expecting DBS to raise its dividend per share (DPS) in 4QFY2024 to meet its baseline guidance of a 24 cent lift in DPS per year.
“Assuming our 4QFY2024 DPS lift expectations are correct, that alone brings FY2025 dividend payout ratio to [around] 68%,” Tan notes.
“While Singapore banks [have] to report [a] Basel-4 transitory lift ([of around] 150-200 bps) from 3QFY2024, the impact would be neutral when fully phased in,” he adds. “Hence management has guided that the transitory lift would not be used for dividend payments.”
As at Sept 23, DBS and its regional peers, Standard Chartered and HSBC Holdings are “overvalued” based on their P/B.
For 1HFY2024 ended June 30, DBS’s net book value per share stood at $22.12. Standard Chartered’s net book value for the same period stood at $6.1 billion. HSBC’s NAV was US$164.47 billion as at the same period.
As at Sept 23, DBS was trading at a mean + standard deviation (s.d.) of 1.575 times. HSBC and Standard Chartered were trading means + s.ds of 0.906 times and 0.572 respectively.
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
As at 9.20am, shares in DBS are trading 5 cents lower or 0.13% down at $38.32
