Higher impairment charges in 2009. DBS mentioned recently at the results briefing that it has about S$15b of SME loans in Hong Kong and about S$9b in Singapore. In terms of its loans breakdown, the manufacturing sector accounted for about 12% of total loan, and this could pose an issue in terms of loan defaults and bankruptcies. While some market watchers are expecting the NPL rate to go back to the Asian Financial Crisis high (which was around 8-9%, see Exhibit 1), we believe that it was due to the inclusion of DBS Thai Danu Bank (DTDB) then. DBS's NPLs stood at S$1958m as at end 2008 or a NPL ratio of 1.5%. If it were to reach 8%, this would mean an increase in NPLs of S$8.5b and we think this situation is unlikely although the market seems to have priced in a certain portion as DBS's market cap fell $2.7b YTD.
In 4Q08, the specific allowances for loans amounted to $224m or an annualised 70bp (more than double the 33bp for the full year). Taking into account DBS's core exposure to both the Singapore and Hong Kong markets, we have upped the provisions for FY09 and FY10, lowered other expenses, and fine-tuned some of the income estimates. We are now going for FY09 earnings of S$1328m, with a more than doubling in provisions to S$1386m (up from S$561m previously), as we expect another 2-3 quarters of high provisions to the same tune or higher than what was reported in 4Q08 of S$316m.
Upgrade to BUY. Since our last report, the stock has dropped 14% to S$7.24 (with yesterday's low at S$6.94). At current price level, we are raising our rating to a BUY with fair value estimate of S$8.20 (prev: $8.60) based on same 0.8x book.
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