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.
Click here for more:
DBS Group Has Been Beaten Down On Worries About China And Commodities
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