Yahoo Finance RHB cuts DBS's target price by 5% after service disruption last week
The glitch has hurt DBS’s reputation and warnings of supervisory action could keep its share price range-bound, says RHB.
DBS Group’s D05 digital banking service disruption last week was but a “transitory dampener”, say RHB Bank Singapore’s analysts. Nevertheless, the glitch has hurt DBS’s reputation as a leading digital and technology bank and warnings of supervisory action would likely keep its share price range-bound in the near term, they add.
As a result, RHB analysts have cut DBS’s target price to $39.80 from $42 in an April 3 note, while keeping “buy” on Singapore’s largest bank. The new target price represents a 21% upside against a last traded price of $33.
Customers were unable to access DBS’s digital services from the morning of March 29. The bank fully restored its digital services around 5.45pm that same day.
According to the bank, the glitch affected its digibank both on mobile and online, as well as its DBS PayLah and DBS mTrading services.
This is the second disruption at DBS in 16 months. In November 2021, a problem with DBS Bank’s access control servers disrupted its online banking services for over three days.
Acknowledging the bank’s failure to ensure uninterrupted digital banking services 24/7, DBS’s management says it will undertake a thorough review of the incident. A special board committee will convene with immediate effect to conduct a full and detailed investigation of the incident.
In response to the disruption, the Monetary Authority of Singapore (MAS) has warned of supervisory action. It said the “disruption of DBS’s digital services is unacceptable, coming a year after a similar incident in November 2021”.
MAS has instructed DBS to conduct a thorough investigation to establish the root cause of the disruption. The regulator added that it will take the commensurate supervisory actions after gathering the necessary facts.
In February 2022, MAS announced supervisory action against DBS after the November 2021 disruption. The regulator ordered DBS to set aside 1.5x on its risk-weighted assets for operational risk, which led to an additional $930 million in regulatory capital that lowered common equity tier-1 (CET-1) ratio by 40 basis points (bps).
With the latest glitch, it will not be a surprise if DBS is required to further raise the multiple for operational risk, according to RHB’s analysts. “That said, we believe this would not impact its operations as CET-1 ratio of 14.6% in December 2022 is comfortably above management’s optimal level of 13%.”
Barring further service downtime, RHB believes investors will eventually refocus on the bank’s “still healthy” earnings trajectory. DBS posted a net profit of $8.19 billion for the FY2022 ended December, 20% higher y-o-y.
The lower target price also takes into account a lower environmental, social and governance (ESG) premium, according to RHB’s proprietary methodology.
In May 2022, RHB trimmed its in-house derived ESG score for DBS to 3.2 from 3.3, out of a maximum score of 4, as analysts recalibrated the assessment of risks and regulatory requirements associated with reliability of digital services, customer data and cybersecurity.
With the latest glitch, RHB analysts further slash DBS’s ESG score to 3.1, which effectively lowers the stock’s ESG premium to 2% from 4%. This brings RHB’s final target price to $39.80 based on an intrinsic value of $39.05 with the lower 2% ESG premium.
The slash in target price also takes into account a slight “bump up” in equity risk premium given the recent banking sector turmoil in the US and the EU, add RHB’s analysts.
As at 9.46am, shares in DBS are trading 6 cents lower, or 0.18% down, at $32.94.
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