Sunday, March 20, 2016

Seeking Alpha: DBS Group Has Been Beaten Down On Worries About China And Commodities

It has been a rough stretch for Singapore's DBS Group (OTCPK:DBSDY) since I last wrote about this leading ASEAN bank, with the shares down more than 20% and underperforming United Overseas Bank (OTCPK:UOVEY) (down about 19%) and Oversea-Chinese Banking Corp. (or OCBC) (OTCPK:OVCHY) (down 11%). While DBS Group actually hasn't performed that poorly from an operational view, with 2015 earnings pretty much in line with the expectations for 2015 back at the time of that last article, investors have grown increasingly concerned about the rate environment, the slowdown in China, the company's commodity lending exposure, and the prospect of higher loan losses.

While high-quality banks in difficult economies have shown in the past that tough times can definitely exceed management expectations (Brazil's Itau Unibanco (NYSE:ITUB) comes to mind), it seems as though the market is expecting DBS to see its non-performing loans jump from less than 1% today to 5% or more over the next couple of years. Possible? Of course. Probable? I don't think so.

In what I think is a relatively bearish scenario (cumulative 2016-2018 earnings about 5% below the current sell-side expectations), DBS Group's ROE slips below 10% for a few years, but the bank would still grow earnings at a roughly 4% annualized rate over the next five years and closer to 6% over the long term (consistent with a low-double-digit ROE). That would support a fair value of over $52 on the ADRs today. If management is right about its loan growth and credit loss experience (in other words, better than the sell-side expectations and better than that bearish outlook), the fair value moves into the mid-to-high $50s relatively quickly.

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DBS Group Has Been Beaten Down On Worries About China And Commodities

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