In fact, the market consensus has already factored in an average 30% yoy decline in FY09 core earnings. Such bearish earnings expectations for FY09 have taken into account high provision charges of $1.2bn on average (a significant 61% surge from FY08), flat loans growth, a more than 10bps-decline in NIM and a 12% yoy dip in fee income. Lower market expectations will minimise earnings downside risks going forward.
The group’s recent $4bn rights issue will boost its CAR from 14% to a pro-forma 16.2% with tier-1 at 12.2% (way above regulatory requirements). As a result, we estimate its excess capital will double to $5.8bn or $2.50 per share. Post-rights, the group has emerged as the Singapore bank with the strongest capital strength that is essential to ride through the downturn and tap on growth opportunities.
The spike in Prime-Hibor spreads in 1Q09 bodes well for the group’s NIM in Hong Kong. The Prime-Hibor spread bounces off its lows in 4Q08 and has widened by 152 bps. This could signal the beginning of a recovery for its Hong Kong business that plunged 90% yoy in 4Q08 when the Prime-Hibor spreads narrowed along with rising provisions and operating costs.
The sharp 11.5% contraction in 1Q09 GDP - the steepest decline since 1976, suggests that the economy is bottoming out. Likewise, we reckon the valuations of the Singapore banks are near their trough valuations. In view of the improved economic outlook, we have turned most positive on DBS in view of its superior capital strength and attractive valuations. Upgrade to BUY at a higher target price of $11 (pegged to 1.1x PBV).
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