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Singapore Q3 GDP Growth Below Expectations - Reaffirms our negative view on DBS Bank with a $18 target.

October 22, 2019

Long time followers to our website and Facebook page would have known that we have a negative view to DBS Bank since Q2 2018 when we first started sharing our views, with the stock being at $30 in April 2018, with targets of $26, followed by $23 for end of 2018.

 

 

DBS stock have since ranged within $23-$27 for the past 12 months in a consolidation phrase.

 

Given continued weakness in Asia over the US-China trade war, by which any upcoming phrase 1 deal have failed to lift Asian equities, we decided to relook at this trade for opportunities to the downside.

 

To keep things simple on a Macro perspective, we think Singapore bank earnings can be based of two simple indicators namely Singapore GDP rate, and SIBOR rates, for which both have direct impact to the banks earnings.

 

Singapore Q3 GDP Growth Below Expectations

 

The economy of Singapore advanced 0.1 percent year-on-year in the third quarter of 2019, the same pace as in the previous period but missing market consensus of a 0.2 percent expansion, an advance estimate showed. This remained the weakest growth rate since the second quarter of 2019, when the economy shrank 1.2 percent, amid a further contraction in manufacturing output and a slowdown in the services and construction activities. 


On a quarter-on-quarter seasonally-adjusted annualised basis, the economy grew by 0.6 percent in the September quarter, compared to expectations of a 1.5 percent expansion and after a downwardly revised 2.7 percent contraction in the second quarter.

 

 (Singapore YoY GDP per quarter)

(Price chart of DBS Bank with timing overlay above with Singapore GDP Data)

 

 

 

One can easily see how DBS stock highs of $30 were made just in Q2 2018 when year on year GDP growth is at 4.6%.

 

With the continued weakness as expected by the Monetary Authority of Singapore by which they have effected easing measures in the October Semi Annual review will provide speculators a good idea to where the weakness is.

 

Sibor Rate

 

One factor holding up the local banks have been that Sibor rates has been rising well into Q1 2019, tracking the US 10Y yields before we saw it moving lower in Q2 and Q3 this year as a result of the U-turn in the Fed rate policy.

 

We think has somewhat of a lagging effect on the earnings of the banks as various corporate bank loans are commonly reviewed on a annual rolling basis, and thus can expect the full impact of lower SIBOR affecting banks net interest margins by Q4 2019 / Q1 2020.

 

 

As we seek to review our global macro calls at the end of the year in preparation for 2020 interest rate plays, we remain bullish US treasuries at this stage in a 6-12 months period given our fundamental believe that the US-China trade war Phrase 1 "Deal" will not be able to boost the global economy by much as damage as already been done to both Asian economies and the USA.

 

We hereby reiterate our bearish view for DBS Bank, with a ongoing target for $18 on the back of weaker earnings in the next 3 quarters due to slow down in Asia possibly resulting in increased provisions for non performing loans and lower interest rates resulting in lower interest income.

 

 

 

 

 

 

 

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