DBS is Singapore's largest bank by group assets (S$260bn at Sept 2008). Its primary focus is Singapore (c62% of group profit before tax) and Hong Kong (c21% of group PBT). It also has exposure to several other parts of Asia, including Thailand, Taiwan, India and Greater China. DBS is known as a corporate- and consumer-focused bank, as well as for its treasury operations. Mr. Richard Stanley assumed the role of DBS Group CEO in May 2008.

We have a Sell / Low Risk (3L) rating on DBS shares, with a target price of S$8, post an assumed S$4.1bn rights offering as recently announced. We are negative on all the Singapore banks given our bearish view on the Singapore economy, and our strategist views that Singapore STI could head to the 1,500 level. DBS has underperformed its peers due to margin pressure concerns and its CDO exposure. While DBS is the most leveraged play to economic recovery, it has the highest operating risk to a deteriorating macroeconomic outlook. DBS is trading near trough-cycle consensus PER levels, but we believe that consensus estimates may have downside risk as the downturn deepens.

Our target price for DBS is S$8. (1) Using a dividend discount model (DDM), assuming a 2009E net DPS of S$0.533, cost of equity of 11% and 4.3% long- term growth rate, gives a fair-value P/E of 10.1x 2009E, which when applied to our 2009E EPS of S$0.79 derives a fair value of S$8. This equates to a 2009E P/B of 0.74x (vs. 8.4% ROAE). We use DDM as a primary valuation tool, as we view it reflects sustainable earnings, dividend growth and excess returns relative to cost of equity, and also factors in liquidity/sentiment impact on valuations. It is also consistent with the methodology underpinning our P/E investment cycle analysis framework. (2) Using our P/E cycle analysis, which suggests an average trough-peak P/E range for the Singapore banks of 11-18x (for DBS 10.6-16.7x, average 13.6x) on one-year forward consensus estimates, our target price PER of 10.1x is below the range trough for DBS.

We rate DBS shares Low Risk to reflect the capital strength and financial regulation of the Singapore bank sector. This is in line with our quantitative risk-rating system, which tracks 260-day historical volatility of the shares. Possible downside and upside risks to our target price include: 1) the impact of the US/global economy on Singapore and Hong Kong's domestic economy and job growth; 2) the level of short-term interest rates and shape of the yield curve (generally low S$ SIBOR and high HIBOR are negative for DBS net interest margins, and conversely); 3) changes to the asset quality position of the bank and in turn provision charges; 4) capital position and potential regional M&A;and 5) the new CEO's new long-term strategy and direction for the bank. These risks could cause the stock to deviate from our target price.