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Singapore’s DBS Reports Excellent 2022 Earnings Despite China Slowdown; FVE Maintained

We’re maintaining our fair value estimate of SGD 41 for this banking group.

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DBS Group Holdings Ltd

We keep our fair value estimate of SGD 41 for DBS Group, equivalent to around 1.8 times 2023 projected book value and 18% above the current share price. For 2023 we forecast bottom-line profit of SGD 10.9 billion, representing return on equity, or ROE, of 18.8%, as net interest margin, or NIM, climbs to 2.14% for the full year in line with DBS’ revised guidance. We forecast that NIM thereafter narrows by 12 basis points per year as interest rates shift to the next cutting cycle and that DBS’ ROE declines to 17.8% in 2024 and 16.8% in 2025. However, this is still well in excess of our assumed cost of equity for DBS of 9.5%, reflecting DBS’ narrow economic moat based on cost advantage and customer switching costs. As such, we think a price/book ratio approaching 2 times (DBS’ peak valuation 15 years ago) is justifiable. Our fair value only implies a 2023 price/earnings ratio of around 9.6 times based on our forecast, which is in line with DBS’ historical range.

We view DBS as the best operator among Singaporean banks and deserving of the highest price/book ratio based on its superior ROE, but a lot of this is already reflected in the current valuation, in our view. DBS’ 18% upside to fair value is less than the upside that we see for DBS’ rivals OCBC and UOB. That said, DBS is well geared to a rebound in economic activity in China as it reopens from COVID-19 restrictions, given its exposure to Greater China and its large wealth-management business. A strong reopening in China and Hong Kong could boost DBS’ wealth-management fees, which have lagged strong inflows of new money as customers have kept their wealth in cash—as well as mean more loan demand from Chinese borrowers and higher interest rates on the mainland making offshore borrowing more attractive again. DBS is also geared to growth in India following its takeover of Lakshmi Vilas Bank in 2020, and is benefitting from the “China plus one” trend of manufacturers diversifying their production locations.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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