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

The Monetary Authority of Singapore (MAS) has already imposed an additional capital requirement on the bank for previous outages in November 2021, March 2023, and May 2023, equivalent to 1.8 times the bank’s risk-weighted assets (RWA). However, MAS has not yet responded to the recent disruptions in September and October 2023, potentially leading to additional penalties. “[This] may include a broad range of penalties, including additional capital charges and/or fines, among others,” wrote Tan on October 15.

Based 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 achieve a total dividend per share of S$2.12, encompassing a higher quarterly dividend of 54 cents and a special dividend of 20 cents in 4QFY2023, resulting in a 6.3% yield. However, these estimates may be jeopardized by potential additional capital charges.

Tan outlines three potential implications for the bank following the recent outage.

1. Reduction in excess capital: DBS may experience a reduction in excess capital if MAS imposes an additional operational RWA charge. In this scenario, excess capital could decrease to S$2 billion or S$1 billion, with the bank’s Common Equity Tier 1 (CET-1) ratio falling to 13.8% or 13.6%. This analysis excludes the 0.5% impact from the completion of an acquisition in 3Q2023.
2. Reputation risk: The bank faces reputation risk, particularly concerning its 86% current account savings account (CASA) ratio with the POSB franchise.
3. Higher operating expenses (Opex): DBS may need to allocate higher operating expenses (opex) to ensure business continuity.

In the broader context, all three Singaporean banks are currently favoured over Singapore Real Estate Investment Trusts (S-REITs) due to the pressure on debt costs from debt refinancing, exchange for risk (EFR) risk, and growth ambitions for assets under management (AUM), coupled with high gearing and cap rate expansion.

Nonetheless, Tan’s cautious outlook for the sector hinges on the potential occurrence of a US recession in 2024 and expectations of a hard landing. In such a scenario, Singapore banks are likely to underperform on an absolute basis.

Among the three banks under scrutiny, Tan maintains a preference for Oversea-Chinese Banking Corporation (OCBC) over DBS due to its “defensive” 6.4% dividend yield, excess capital buffer, potential net interest margin (NIM) expansion in 3QFY2023, and earnings growth resulting from credit cost normalization. This could drive expectations for a higher dividend in 2HFY2023.

As of Oct 16 at 11.03 am, DBS shares are trading 33 cents lower, down by 0.98%, at S$33.44. However, as of October 17 at 10:46 am, the shares were observed at S$33.60, marking an increase of 16 cents or 0.48%.