DBS - Rights come with a price

DBS’s recent S$4bn rights issue has bolstered its balance sheet, but we expect immediate EPS dilution and a big drag on ROE. We do not believe the company can maintain its final-quarter dividend of S$0.14 through 2009, as the payout would exceed 60%. We also believe management’s organic growth focus to expand its loans above (Singapore) system pace and to take market share in 2009 could place additional pressure on asset quality and lower potential dividend payouts.

We expect a slightly better net profit (quarter-on-quarter) for 1Q09 from a decline in operating expenses and slightly lower provisions. DBS’s net-interest income should improve as a result of higher lending margins, but we expect the low SIBOR to keep its overall NIM flat. We forecast a sharp quarterly dividend cut to S$0.10 (compared with S$0.14 for 4Q08).

DBS’s shares are trading above our zero-growth DDM value of S$6.16 (excluding final-quarter dividend for 2008). We have assumed a CAPM-derived cost of equity of 7.69%. Our new target price is equivalent to 0.60x book (December 2008, adjusted for the rights issue). The stock’s previous PBR troughs were in 2003 (0.84x) and 1998 (0.39x).

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