3 negatives to watch out for in DBS' August results

Will trading profits be badly hurt?

According to CIMB, the negatives to watch out for would be 1) how much trading profits will get hurt from the sudden selloff in global bonds in mid-May to June; 2) if trade finance flows can hold up as China slows down rapidly this quarter; and 3) whether higher NPLs for its South Asia loan book is part of a new trend that we should be worried about, given continued difficulties with the Indian economy and DBS’s historical Achilles heel of seeing NPLs from its non-Singapore loan book showing up every now and then.

Here's more from CIMB:

We suspect that the impact of lower trading profits will drag down ROEs quite a bit, we expect 2Q ROEs to come down to the 10.5%-10.7% range, down from 12.0% in 1Q.

Further ahead in 3Q, we expect ROEs to rebound from 2Q levels as a small window for equity deals have opened and the steeper yield curve provides some scope for gapping.

Our target price for DBS (Outperform) is S$19.02, based on 1.38x CY13 P/BV (ROE: 11.4%, COE: 9.6%, g: 4.9%). On the PT Bank Danamon deal, we would not be surprised if Bank Indonesia takes its time to approve the deal, and the deadline extended again.