“Sell” call on DBS after latest disruption: Citi Research analyst

The Financial Authority of Singapore (MAS) has already imposed a further capital requirement on the financial institution for earlier outages in November 2021, March 2023, and Could 2023, equal to 1.8 occasions the financial institution’s risk-weighted property (RWA). Nonetheless, MAS has not but responded to the current disruptions in September and October 2023, probably resulting in further penalties. “[This] might embody a broad vary of penalties, together with further capital expenses and/or fines, amongst others,” wrote Tan on October 15.

Based mostly on analyst transcripts for 2QFY2023, DBS’s baseline dividends per share for FY2024 are projected at S$1.92 or 48 cents per quarter.

For FY2023, Tan anticipates DBS to attain a complete dividend per share of S$2.12, encompassing the next quarterly dividend of 54 cents and a particular dividend of 20 cents in 4QFY2023, leading to a 6.3% yield. Nonetheless, these estimates could also be jeopardized by potential further capital expenses.

Tan outlines three potential implications for the financial institution following the current outage.

1. Discount in extra capital: DBS might expertise a discount in extra capital if MAS imposes a further operational RWA cost. On this state of affairs, extra capital might lower to S$2 billion or S$1 billion, with the financial institution’s Frequent Fairness Tier 1 (CET-1) ratio falling to 13.8% or 13.6%. This evaluation excludes the 0.5% influence from the completion of an acquisition in 3Q2023.
2. Fame threat: The financial institution faces fame threat, notably regarding its 86% present account financial savings account (CASA) ratio with the POSB franchise.
3. Increased working bills (Opex): DBS might have to allocate larger working bills (opex) to make sure enterprise continuity.

Within the broader context, all three Singaporean banks are presently favoured over Singapore Actual Property Funding Trusts (S-REITs) because of the strain on debt prices from debt refinancing, trade for threat (EFR) threat, and progress ambitions for property below administration (AUM), coupled with excessive gearing and cap price growth.

Nonetheless, Tan’s cautious outlook for the sector hinges on the potential incidence of a US recession in 2024 and expectations of a tough touchdown. In such a state of affairs, Singapore banks are more likely to underperform on an absolute foundation.

Among the many three banks below scrutiny, Tan maintains a choice for Oversea-Chinese language Banking Company (OCBC) over DBS on account of its “defensive” 6.4% dividend yield, extra capital buffer, potential internet curiosity margin (NIM) growth in 3QFY2023, and earnings progress ensuing from credit score value normalization. This might drive expectations for the next dividend in 2HFY2023.

As of Oct 16 at 11.03 am, DBS shares are buying and selling 33 cents decrease, down by 0.98%, at S$33.44. Nonetheless, as of October 17 at 10:46 am, the shares have been noticed at S$33.60, marking a rise of 16 cents or 0.48%.