DBS Group Holdings

Upgrade on Valuations
BloombergReuters POEMS DBS SP DBSM SIDBS SG Industry: Regional Banks Phillip Securities Research Pte Ltd 8 July 2013
DBS Group Holdings Rating - Previous Rating Target Price (SGD) - Previous Target Price (SGD) Closing Price (SGD) Expected Capital Gains (%) Expected Dividend Yield (%) Expected Total Return (%) Raw Beta (Past 2yrs w eekly data) Market Cap. (USD mn / SGD mn) 3M Average Daily T/O (mn) 52 w eek range (SGD) Closing Price in 52 w eek range 0% 19.00 18.00 17.00 16.00 15.00 14.00 13.00 12.00 11.00 10.00
Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13

Report type: Update

Company Overview DBS Group is the holding company for DBS Bank Ltd that provides various banking services for consumers, corporate, SMEs and wholesale banking activities mainly in Asia. Its main operations are in Singapore and Hong Kong, and its current focus is on China, Taiwan and India. Share price has corrected since our downgrade. Current valuations are undemanding and remain lowest among local peers. Continued high quality earnings growth expected. Upgrade to Accumulate with unchanged target price of S$17.20, based on unchanged P/B of 1.24X. What is the news? DBS will be announcing its 2Q13 results in the coming weeks. Since our downgrade on valuations of DBS to Neutral on 3 May, DBS has underperformed the STI, while share price has corrected on concerns over the tapering of QE, and weaker economic data for China. How do we view this? We turn positive on DBS due to the following reasons: Valuations lowest among local peers. After the recent correction, valuations are now undemanding. DBS is trading at a current P/B of 1.18X. However, this is lower as compared to its local peers of 1.33X-1.43X. DBS continues to report strong earnings, with strong net interest income from lower cost of funding, strong fees and commission with growth in Wealth Management, Trade-related and Loan-related fees and commission. Non interest income is also improving with higher customer flows. This provides high quality recurring earnings, comparable to those of its peers. 2Q13s Non-interest income could continue to benefit from high customer flows for its FX products as RMB appreciated against the USD until mid June 2013. Eventual increase in interest rates to increase Net Interest Income. Funding cost also remains cheapest among local peers, with the largest proportion of CASA deposits. Funding cost is expected to remain relatively stable when interest rates increase. We present a detailed outlook for the various revenue segments in our Banking Sector report dated 8 Jul 2013. Investment Actions? We maintain our FY2013 earnings forecast. FY13E EPS remains at S$1.43, and BVPS remains at S$13.90. Based on the undemanding valuations after the recent correction, and the continued high quality recurring earnings growth potential per above, we upgrade our rating to Accumulate. We maintain our target price of S$17.20, based on unchanged P/B of 1.24X. MCI (P) 194/11/2012 Ref. No.: SG2013_0115

2 3 17.20 17.20 15.90 8.2% 3.5% 11.7% 1.14 30443 / 38838 5.3

Accum ulate Neutral

13.66 - 17.9

50%

100% 60 50 40 30 20 10 0

Volume, mn

DBS SP EQUITY

STI rebased

Major Shareholders 1. Temasek Holdings Pte Ltd 2. Commonw ealth Bank of Australia 3. Harbor Capital Advisors Inc Ke y Financial Sum m ary FYE Revenue (SGD mn) Net Profit, adj. (SGD mn) EPS, adj. (SGD) P/E (X),adj. BVPS (SGD) P/B (X) DPS (SGD) Div. Yield (%) Source: Bloomberg, PSR est. *All multiples & yields based on current market price Valuation Method P/B Analyst Ke n Ang Kenangw y@phillip.com.sg Tel : (65) 6531 1793 12/11 7,636 3,035 1.30 12.2 12.15 1.31 0.56 3.5% 12/12 8,514 3,359 1.37 11.6 12.96 1.23 0.56 3.5% 12/13F 8,790 3,517 1.43 11.1 13.90 1.14 0.56 3.5%

(%) 29.4 2.7 1.4 12/14F 9,229 3,719 1.51 10.5 14.85 1.07 0.56 3.5%

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DBS Group Holdings Singapore Equities Research 8 July 2013

Table 1. Growth in revenue SGD mn Net interest inc Net fee and comm inc Other non-interest inc Total Table 2. Fee and commission income SGD mn Stockbroking Investm ent banking Trade and transaction svc Loan related Credit card Wealth m anagement Others Fee and commission expense Total Table 3. Other non-interest income SGD mn Net Trading income Fin Invt designated at FV Net income on Fin Invt Net gain on fixed assets Others (inc. rental inc) Total other non int Inc Table 4. Loans by Industries SGD mn Manufacturing Building and construction Housing loans General comm erce Tpt, storage & comm s FIs, invt & holding co Professionals & Pri inv Others Total loans Table 5. Loans by currencies SGD mn Singapore dollar Hong Kong dollar US dollar Others Total loans 1Q13 1,327 507 483 2,317 1Q12 1,336 406 414 2,156 %y-y ch -0.7% 24.9% 16.7% 7.5% 4Q12 1,293 372 744 2,409 %q-q ch 2.6% 36.3% -35.1% -3.8%

1Q13 62 64 134 103 78 113 14 (61) 507

1Q12 52 32 122 83 74 78 15 (50) 406

%y-y ch 19.2% 100.0% 9.8% 24.1% 5.4% 44.9% -6.7% 22.0% 24.9%

4Q12 44 27 115 70 82 77 7 (50) 372

%q-q ch 40.9% 137.0% 16.5% 47.1% -4.9% 46.8% 100.0% 22.0% 36.3%

1Q13 410 (2) 66 9 483

1Q12 325 (33) 109 2 11 414

%y-y ch 26.2% -93.9% -39.4% N.M -18.2% 16.7%

4Q12 136 (2) 103 41 16 294

%q-q ch 201.5% 0.0% -35.9% N.M -43.8% 64.3%

1Q13 31,385 37,113 46,500 46,147 17,535 10,431 15,488 9 204,608

1Q12 25,792 33,606 41,763 35,102 16,731 11,064 13,360 11 177,429

%y-y ch 21.7% 10.4% 11.3% 31.5% 4.8% -5.7% 15.9% -18.2% 15.3%

4Q12 27,037 36,179 45,570 38,230 17,745 11,155 14,969 16 190,901

%q-q ch 16.1% 2.6% 2.0% 20.7% -1.2% -6.5% 3.5% -43.8% 7.2%

1Q13 95,110 29,205 73,993 9 198,317

1Q12 81,938 29,746 61,692 11 173,387

%y-y ch 16.1% -1.8% 19.9% -18.2% 14.4%

4Q12 90,503 29,443 67,156 16 187,118

%q-q ch 5.1% -0.8% 10.2% -43.8% 6.0%

Table 6. Revenue by Business segments SGD mn Consumer/ Priv Banking Institutional Banking Treasury Others Total Revenue

1Q13 622 1,202 323 170 2,317

1Q12 603 1,100 406 47 2,156

%y-y ch 3.2% 9.3% -20.4% 261.7% 7.5%

4Q12 562 984 291 122 1,959

%q-q ch 10.7% 22.2% 11.0% 39.3% 18.3%

Table 7. Revenue by Geographical segments SGD mn 1Q13 1Q12 Singapore 1,449 1,336 Hong Kong 474 385 Greater China 170 181 S & SEA 153 167 Rest of the world 71 87 Total Revenue 2,317 2,156 Source (tables 1-7): Com pany, Phillip Securities Research

%y-y ch 8.5% 23.1% -6.1% -8.4% -18.4% 7.5%

4Q12 1,198 395 137 147 82 1,959

%q-q ch 21.0% 20.0% 24.1% 4.1% -13.4% 18.3%

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DBS Group Holdings Singapore Equities Research 8 July 2013

Fig 1: Net interest margin 1,400 1,300 1,200 1,100 1,000 900 800 2.20 2.10 2.00 1.84 1.80 1.79 1.80 1.80 1.90 1.77 1.73 1.73 1.72 1.80 1.67 1.62 1.64 1.70 1.60 1.50 1.40
Net interest income - LHS NIM-RHS

Fig 2: NonII/Total revenue 1,200 1,100 1,000 900 800 700 600 500 400
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Non-interest income - LHS NonII/total income (%) - RHS

60.00 43 32 34 34 50.00 40.00 30.00 20.00 10.00 0.00

41

40

41 36 35

38 33

38

Fig 3: Efficiency ratio 1,200 1,100 1,000 900 800 700 600 500 400
Expenses - LHS Ef f iciency ratio (%) - RHS

40

Fig 5: Deposits, Loans, LDR 300,000 250,000 200,000 150,000 100,000 50,000 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Cus dep Cus loans LDR (%) - RHS 120

Fig 7: Growth in selected asset items 350,000 300,000 250,000 200,000 150,000 100,000 50,000
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Financial assets and investments Cash equivalents Loans to nonbank customers

Fig 9: ROE and ROA 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
ROE - RHS ROA - LHS

2Q10 2Q10

40

3Q10

45

4Q10 4Q10

41

1Q11

43

2Q11

43

3Q11

46

4Q11

42

1Q12

45

2Q12

45

3Q12

48 41

4Q12

1Q13

Fig 4: Net profit margin 65.0 55.0 45.0 35.0 25.0 15.0 5.0 -5.0 600 500
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

1,000 900 800 700 40 39

Net profit - LHS

Net prof it margin (%) - RHS

60.0 50.0 40.0 30.0 20.0 10.0 0.0

39

42

40

39

43 38

43 42 32

41

79

3Q10

1Q11

2Q11

3Q11

80 79

79

80

85 86

4Q11 4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

Fig 6: Total allowances/NPA, NPL 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
NPL (%) - RHS Total cumulative impairment as % of NPA

2.5 2.0

85

89

84 87

89

100 80 60 40 20 0

2.3

2.1

1.9

1.8 1.5 1.3 1.3 1.3 1.3 1.3 1.2 1.2

1.5 1.0 0.5 0.0

Fig 8: Capital Adequacy Ratio 20 15 10 5 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
CET1 CAR Tier 1 CAR Total CAR

Fig 10: EPS and NBV 14.0 12.0 10.0 8.0 6.0 4.0
1Q12 2Q12 3Q12 4Q12 1Q13

2Q10

3Q10

4Q10

1Q11

1.8 1.6 1.4 1.2 1.0 0.8 0.6

2Q10 3Q10 4Q10 1Q11

Diluted NAV - RHS Diluted EPS exclude extra items - LHS

2Q11 2Q11

3Q11 3Q11

4Q11 4Q11

1Q12 1Q12

2Q12 2Q12

3Q12 3Q12

4Q12 4Q12 1Q13

1Q13

16.00 15.00 14.00 13.00 12.00 11.00 10.00 9.00 8.00

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DBS Group Holdings Singapore Equities Research 8 July 2013

Fig 11: Revenue by geographical segment 1,600 1,400 1,200 1,000 800 600 400 200 Singapore Hong Kong Greater China S&SEA Others Fig 12: Geo segment breakdown by Revenue for current period Others, 71 , 3% S&SEA, 153 , 7% Greater China, 170 , 7% Hong Kong, 474 , 20% Singapore, 1,449 , 63%

Fig 13: Revenue by Business segment 1,400 1,200 1,000 800 600 400 200 Consumer/ Private Banking Institutional Banking Treasury Others

Fig 14: Net interest income trend 1,400 1,300 1,200 1,100 1,000 900 800
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Net interest income SMA

Fig 15: Fee and Commission trend 600 500 400 300 200 100 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Net fee and commission income SMA

Fig 16: Other non interest income trend 800 700 600 500 400 300 200 100 2Q10 3Q10 4Q10 1Q11
Other noninterest income trend SMA

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

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DBS Group Holdings Singapore Equities Research 8 July 2013

FYE Dec Valuation Ratios P/E (X), adj. P/B (X) Dividend Yield (%) Per share data (SGD) EPS, reported EPS, adj. DPS BVPS Grow th & Margins (%) Grow th Net interest income Non interest income Pre provision operating profit Operating income Net income, reported Net income, adj Margins Net interest margin Key Ratios (%) ROE ROA RORWA Non-interest/total income ratio Cost/income ratio Loan/deposit ratio NPL ratio Incom e Statem ent (SGD mn) Net Interest Income Fees and Commission Other Non interest income Total operating income Operating expenses Provisions Operating profit Associates & JVs Goodw ill charges Profit Before Tax Taxation Profit After Tax Non-controlling Interest Net Income, reported Net Income, adj. Source: PSR FY10 13.8 1.39 3.5% 0.70 1.15 0.56 11.41 FY11 12.2 1.31 3.5% 1.30 1.30 0.56 12.15 FY12 11.6 1.23 3.5% 1.55 1.37 0.56 12.96 FY13F 11.1 1.14 3.5% 1.43 1.43 0.56 13.90 FY14F 10.5 1.07 3.5% 1.51 1.51 0.56 14.85

-3.0% 28.5% 7.3% 31.6% -20.4% 29.1% 1.84%

11.7% 2.3% 8.1% 11.8% 86.3% 14.7% 1.77%

9.5% 14.9% 11.5% 24.1% 25.3% 10.7% 1.70%

5.4% -0.2% 3.2% -6.1% -7.7% 4.7% 1.65%

8.0% -0.2% 5.0% 5.6% 5.7% 5.7% 1.67%

10.2% 0.6% 0.9% 38.9% 41.4% 78.5% 1.86

11.0% 1.0% 1.5% 36.8% 43.3% 86.4% 1.33

12.6% 1.1% 1.8% 37.9% 42.4% 86.7% 1.23

10.7% 0.9% 1.5% 36.7% 44.6% 89.7% 1.16

10.6% 0.9% 1.5% 34.9% 45.5% 90.1% 1.19

4,318 1,397 1,351 7,066 2,925 911 3,230 102 1,018 2,314 454 1,860 228 1,632 2,645

4,825 1,547 1,264 7,636 3,303 722 3,611 127 3,738 443 3,295 255 3,040 3,035

5,285 1,579 1,650 8,514 3,614 417 4,483 124 4,607 588 4,019 210 3,809 3,359

5,569 1,764 1,458 8,790 3,919 663 4,209 136 4,345 608 3,737 220 3,517 3,517

6,012 1,868 1,349 9,229 4,198 586 4,445 150 4,595 643 3,951 232 3,719 3,719

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DBS Group Holdings Singapore Equities Research 8 July 2013

FYE Dec Balance Sheet (SGD mn) Cash, balances and placements w ith central banks Singapore Government treasury bills and securities Due from banks Financial assets at fair value though profit or loss Positive fair values for financial derivatives Financial investments Securities pledged Other assets Loans to non-bank customers Investment in associates Goodw ill on consolidation Properties and other fixed assets Investment properties Deferred tax assets Total Assets Due to banks Due to non-bank customers Financial liabilities at fair value through profit or loss Negative fair values for financial derivatives Bills payable Current tax liabilities Deferred tax liabilities Other liabilities Other debt securities in issue Subordinated term debts Total liabilities Share capital Other reserves Revenue reserves/ Retained earnings Shareholder's equity Non-controlling interest Total Equity Cashflow Statements (SGD mn) CFO PBT Adjustments Cash from ops before WC changes WC changes Cashflow from ops Cashflow from investments Cashflow from financing Net change in cash CCE, end Source: PSR FY10 31,203 11,546 20,306 10,179 16,767 26,550 1,982 6,379 151,698 813 4,802 1,025 358 102 283,710 18,811 187,695 10,228 17,222 601 879 40 6,574 2,160 6,398 250,608 8,696 7,084 10,819 26,599 6,503 33,102 FY11 25,304 12,503 25,571 11,927 21,164 30,491 2,634 9,730 194,275 949 4,802 976 372 149 340,847 27,601 218,992 11,912 22,207 254 837 30 10,287 10,354 5,304 307,778 9,196 7,075 12,523 28,794 4,275 33,069 FY12 17,772 12,092 28,808 11,540 17,280 35,567 4,397 8,611 209,395 1,236 4,802 945 497 91 353,033 25,162 241,165 7,849 17,532 316 824 30 8,416 10,236 5,505 317,035 9,542 7,229 14,966 31,737 4,261 35,998 FY13F 37,015 14,659 32,142 13,775 14,943 38,313 4,331 9,328 237,144 1,372 4,802 917 504 148 409,392 41,314 264,515 17,706 15,277 301 924 86 10,646 14,531 5,542 370,842 9,753 7,228 17,088 34,069 4,481 38,550 FY14F 43,516 15,043 32,844 14,076 14,943 38,291 4,444 10,598 253,546 1,522 4,802 825 504 148 435,102 45,617 281,524 19,550 15,277 301 924 86 10,646 14,531 5,542 393,997 9,753 7,228 19,410 36,391 4,713 41,105

1,855 2,061 3,916 1,313 4,847 134 920 5,901 25,112

3,290 716 4,006 (5,172) (1,677) (139) (4,386) (6,202) 18,891

4,019 149 4,168 (10,489) (6,908) 25 (916) (7,799) 10,993

3,737 1,305 5,041 18,262 22,696 (142) (1,184) 21,370 32,363

3,951 1,263 5,214 3,419 7,990 (92) (1,396) 6,502 38,864

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DBS Group Holdings Singapore Equities Research 8 July 2013

Ratings History 18.5 17.5 16.5 15.5 14.5 13.5 12.5 11.5 10.5
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13
M arket Price Target Price

Source: Bloomberg, PSR

1 2 3 4 5 PSR Rating System Total Returns Recommendation Rating > +20% Buy 1 +5% to +20% Accumulate 2 -5% to +5% Neutral 3 -5% to -20% Reduce 4 < -20% Sell 5 Remarks We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk rew ard profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

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DBS Group Holdings Singapore Equities Research 8 July 2013

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DBS Group Holdings Singapore Equities Research 8 July 2013

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HONG KONG Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel +852 2277 6600 Fax +852 2868 5307 Websites: www.phillip.com.hk

CHINA Phillip Financial Advisory (Shanghai)Co. Ltd No 550 Yan An East Road, Ocean Tower Unit 2318, Postal code 200001 Tel +86-21 5169 9200 Fax +86-21 6351 2940 Website: www.phillip.com.cn UNITED KINGDOM King & Shaxson Capital Limited 6th Floor, Candlewick House, 120 Cannon Street, London, EC4N 6AS Tel +44-20 7426 5950 Fax +44-20 7626 1757 Website: www.kingandshaxson.com SRI LANKA Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 Website: www.ashaphillip.net/home.htm

THAILAND Phillip Securities (Thailand) Public Co. Ltd 15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand Tel +66-2 6351700 / 22680999 Fax +66-2 22680921 Website www.phillip.co.th UNITED STATES Phillip Futures Inc 141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building Chicago, IL 60604 USA Tel +1-312 356 9000 Fax +1-312 356 9005 INDIA PhillipCapital (India) Private Limited No. 1, C Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 Website: www.phillipcapital.in

AUSTRALIA PhillipCapital Level 12, 15 William Street, Melbourne, Victoria 3000, Australia Tel +61-03 9629 8288 Fax +61-03 9629 8882 Website: www.phillipcapital.com.au

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