DBS profits could grow by up to 7% through 2018

Thanks to better than expected cost management.

In the face of worsening asset quality amid the turning credit cycle, Maybank KimEng thinks DBS can retain or even grow profitability from better cost containment.

According to the research house, Singapore banks are struggling with sluggish loan demand and likely to face pricing pressures to grow market share for loans in Singapore but DBS' cost containment could be better than expected.

Here's more from Maybank KimEng:

We have revised our cost assumptions in light of management’s cost income ratio (CIR) guidance and recent news of further cost rationalization by the bank.

Management expects CIR to be 43-44% for FY16E. Accordingly, we turn more positive on its cost management vs peers (CIR for UOB/OCBC: 45-46% for FY16-18E).

We now estimate CIR to be ~44% for FY16-18E (from 45-47% previously) as we think it can continue to drive down expenses from strategic cost management and digitalization efficiencies.

With that, we revise net profits upwards by ~2-7% for FY16-18E. Our TP is raised by 8% to SGD15.68 based on ~0.9x FY17E P/BV (from 0.8x FY17E P/BV), close to -1SD below the historical mean to reflect our lower forecast ROE compared to prior periods.

With the change in EPS, our assumed sustainable ROE is now 9.6% (9.1% previously), COE of 10.5% and growth rate of 3.5%.