DBS Group's share price plunges following US Fed rate cuts

Stocks of Singapore’s largest listing DBS Group are approaching share price levels not seen since 2016.

Shares of the money lending group fell 3.98% from the previous week’s closing price to close Monday 16 March at S$18.58 per share.

The last time the group’s share price traded at this level was in January 2017.

Read also: Top 9 SGX billion-dollar stocks in terms of fundamentals

Singapore banks are second-most geared toward US rates in Asia

Today’s share price fall has not come as a huge surprise, after Bloomberg Intelligence analysts told IG Asia recently that Singapore banks are expected to be impacted heavily by upcoming US interest rate movements.

On Sunday 15 March, the US Federal Reserve announced in an emergency press conference that it would slash interest rates, or the Fed fund rate (FFR), by 100 basis points (bps) to a range of 0% to 0.25%, the lowest level since 2015, in a bid to combat the economic fallout caused by the coronavirus pandemic.

This cut follows a half percentage point rate reduction already rolled out on 03 March. The previous target range was 1% to 1.25%.

Diksha Gera, Sector Head, Global Financials Research, said in a research call on Wednesday 11 March that ‘Hong Kong banks are the most geared toward US interest rates, followed by Singapore banks’.

In saying that, she added that there’s also a possible ‘second order impact’ of whether Asian regulators and central banks will decide to follow the US Federal Reserve rate moves.

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US Fed rate cuts to eat into DBS’ net interest margins

That second factor, however, is looking to be a smaller possibility, according to local brokers on the ground.

CIMB analysts are of the opinion that the Fed rate cuts will eat into DBS Group’s net interest margins (NIMs) by 12 basis points (bps) in the 2020 financial year, and another five bps in 2021.

They stated that while DBS has been the best at asset-liability management – alongside the biggest growing margins of 14bps between 2017 and 2019 – Fed rate cuts are likely to ‘get transmitted’ into the bank’s interest rates after three to six months.

As the global coronavirus situation is getting worse, analysts wrote that they ‘turn more pessimistic’ and as such pushed up credit cost estimates to 28bps (from 25bps previously).

‘Negative signalling from the Fed rate stimulus also leads us to believe that regional growth could falter more substantially than expected; thus, we revise loan growth estimates to 2-3% in FY20-21F as well,’ they added.

On that note, they have lowered their rating on the stock to a ‘hold’ alongside a lower 12-month share price target of S$24.33 from S$27.09 previously.

RHB researchers had already cut their NIM forecast for DBS Group’s 2020 financial year to 1.78% from 1.81% on the back of the last round of FFR reduction. They stated that the first cut on 03 March of 50bps to 1.25% had led to a sharp fall in three-month SIBOR to the current 1.35%, versus February’s 1.69%.

During the FY19 results briefing in mid-February, DBS management had also guided for FY20 NIM to be 7bps narrower versus FY19’s 1.89%, on the assumption of only one FFR cut in 2020.

RHB’s analysis appears to imply a high level of expectation for SIBOR to reflect Sunday’s interest rate slash.

The analysts have reiterated a ‘neutral’ rating on the stock, with a lower Gordon Growth Model-derived share price of S$21.50, from S$24.80 previously. This represents a 2.4% upside with a c.6% yield, based on 1.09x 2020F P/NBV.

UOB analysts also cut their 2020 earnings forecast for DBS by 5.8%, citing further NIM compression on a 75bp cut in FFR in the first half of 2020. Despite that, they have maintained a ‘buy’ rating for the stock and a similar price target of S$26.20.

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