JP Morgan downgrades DBS to 'neutral' as future earnings growth already priced in

As current accounts and savings account (CASA) depositors switch to fixed deposits, DBS’s higher cost of funds should increase faster than the street’s expectations, Modi reckons, and this may imply that net interest margin (NIM) expansion may be limited next year.

While the rate hike cycle may peak in 1Q2023, the elevated rates may increase the probability of asset quality risks. During a 3QFY2022 results briefing, DBS Group's CEO Piyush Gupta guided for credit costs of around 20 basis points in FY2023.

As a result, Modi says that DBS’s current valuation including its 1.7x price-to-book (P/B) ratio, and ROE expectations of 14% to 15% for FY2023 to FY2024 are priced in, as risks of a US recession become increasingly likely.