The Singapore research team at RHB Bank Singapore has kept its “neutral” call on DBS Group Holdings with a lower target price of $33 from $35.70 as it sees the weak economic outlook affecting the bank’s prospects.
“Against the backdrop of a weak domestic economy and an uncertain global economic outlook, and an above-mean valuation of 1.4x P/BV, DBS’s share price will likely be range-bound in the near term,” the team writes in its June 23 report.
Singapore’s non-oil domestic exports (NODX) fell by 14.7% y-o-y in May, which stood lower than the market’s estimates. The drop resulted in an overall NODX contraction of 14.6% from January to May this year.
RHB’s economists are expecting Singapore’s GDP for the 2Q2023 to contract by 1.4% y-o-y with heightening risks of a technical recession in 1H2023.
“While RHB’s in-house 2023 GDP forecast of 2% y-o-y is kept unchanged for now, the balance of risks is tilted towards the downside, given the continued weakness in Singapore’s NODX figures,” says the RHB team.
To this end, the weak economic outlook could see businesses staying cautious in the early part of 2024, which has led the team to cut its FY2024 earnings estimates by 9.6%. The team has also lowered its earnings estimates for FY2025 by 11.6%.
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“The FY2024 – FY2025 revisions take into account assumptions of lower net interest margins (NIM)s, slightly higher credit costs and a higher effective tax rate – given management’s guidance for higher taxes under the base erosions and profit sharing 2.0 rules,” says the team. “Overall, we expect net profit to dip by 3% y-o-y in FY2024, before rising by 4% y-o-y in FY2025.”
The team has kept its FY2023 earnings estimates unchanged as it still sees the bank’s earnings supported by a still-healthy NIM.
The imposed penalty by the Monetary Authority of Singapore (MAS), which was announced on June 21, is unlikely to have a material impact on DBS’s earnings, although it has, once again, highlighted the bank’s operational shortcomings, notes the RHB team.
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MAS had imposed composition penalties of $3.8 million on DBS, Oversea-Chinese Banking Corporation (OCBC), Citibank and Swiss Life for breaching its anti-money laundering and countering the financing of terrorism (AML/CFT) requirements. Of the amount, DBS got the majority of it with a penalty of $2.6 million.
The bank was penalised for breaches that took place between July 2015 and February 2020 with issues relating to the accounts of 11 corporate customers.
In response, DBS said that between 2019 and 2022, it had been working closely with MAS to enhance the effectiveness of its AML controls, says the RHB team.
“DBS has materially improved its ability to detect and mitigate risks arising from complex networks, and MAS has recognised the improvements made,” it adds.
RHB’s new target price comes after lowering its earnings estimate. The new figure is also based on an intrinsic value of $32.36, with a 2% environmental, social and governance (ESG) premium applied, in line with the brokerage’s in-house ESG methodology.
The Gordon growth model (GGM)-derived P/BV of 1.4x (from 1.5x) is above +1 standard deviation from its historical mean, against a return on equity (ROE) of 15.6%, says the team.
Amongst the three Singapore banks, UOB is RHB’s top pick.
Shares in DBS closed 39 cents lower or 1.23% down at $31.43 on June 23.
