Singapore’s DBS Reports Excellent 2022 Earnings Despite China Slowdown; FVE Maintained

We keep our fair value estimate of SGD 41 for DBS Group, equivalent to around 1.8 times 2023 projected book value and 18% above the current share price. For 2023 we forecast bottom-line profit of SGD 10.9 billion, representing return on equity, or ROE, of 18.8%, as net interest margin, or NIM, climbs to 2.14% for the full year in line with DBS’ revised guidance. We forecast that NIM thereafter narrows by 12 basis points per year as interest rates shift to the next cutting cycle and that DBS’ ROE declines to 17.8% in 2024 and 16.8% in 2025. However, this is still well in excess of our assumed cost of equity for DBS of 9.5%, reflecting DBS’ narrow economic moat based on cost advantage and customer switching costs. As such, we think a price/book ratio approaching 2 times (DBS’ peak valuation 15 years ago) is justifiable. Our fair value only implies a 2023 price/earnings ratio of around 9.6 times based on our forecast, which is in line with DBS’ historical range.