

FIG Commercial Banks

Company report

Equity – Singapore

DBS Group (DBS SP) Buy: Returns matter more than asset growth

Buy Target price (SGD) Share price (SGD) Upside/Downside (%) Dec

25.00 21.40 16.8

2014a

2015e

2016e

1.56 13.7

1.85 11.6

2.14 10.0

Performance

1M

3M

12M

Absolute (%) Relative^ (%)

2.9 2.7

1.5 6.3

18.7 18.6

HSBC EPS HSBC PE

27 July 2015 Kar Weng LOO* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 66580621 [email protected] Ashish Khare* Associate Bangalore View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report:

The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch

MICA (P) 073/06/2015 MICA (P) 136/02/2015 MICA (P) 041/01/2015

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

 2Q15 net profit beats consensus by 10%  DBS cares about returns, not just asset growth  Reiterate Buy with unchanged Gordon growth-based target price of SGD25; an HSBC Asia Super Ten portfolio stock 2Q15 net profit beats market expectations. 2Q15 pre-provisioning operating profit (PPOP) fell 5% q-o-q, to SGD1,472m, on lower trading income and weak loan growth. Other top-line indicators were robust, with NIM and fee income rising strongly. Fee income was up 4% q-o-q, thanks to stronger brokerage, wealth management and investment banking fees. All in all, bottom-line core net profit was down only 1% q-o-q, to SGD1,117m. This was in line with our expectations but 10% above consensus. Together with the results, DBS declared an interim DPS of SGD0.30 (1.4% yield). 2Q15 shows that DBS cares about returns and not just balance sheet growth. Total assets shrunk 4% q-o-q because of weak loan demand. Total loans rose only 1% q-o-q in constant currency terms but this should come as no surprise given the trends seen in the sector. To manage the impact of slowing loans and protect profitability, DBS reduced its expensive funding. As a result, deposits fell 6% q-o-q as time deposits fell, boosting the bank’s loan-deposit ratio to 92% (1Q15: 87%). Combined with the impact of higher domestic interest rates, this lifted NIM by 6bp q-o-q to 1.75% (+4bp from higher domestic rates), the most significant increase in more than a decade. Asset quality also looks good, with gross NPL staying stable q-o-q at 0.88% and loan loss coverage at 147%. Well positioned, against an uncertain macro backdrop. DBS acknowledges that the macro outlook remains uncertain. However, it believes it is well positioned to face this uncertainty. Asset quality is well managed with no visible signs of systemic stress. DBS has prepared itself to face potential asset quality slippage by building up its loan loss coverage to an all-time high of 147% over the years. Its liquidity position looks strong, with a liquidity coverage ratio (LCR) of 131%. Management will look to manage its overall loan-deposit ratio at c.90%. It expects 2H15 NIM to remain stable from 2Q15. Reiterate Buy, with unchanged SGD25 target price. At 1.2x Dec 2016e BVPS and 10x 2016e EPS, DBS looks undemanding, especially with EPS poised to grow at a 17% CAGR over the next two years and ROE set to expand to 12.7% by 2016e (from 11.5% in 2014). This, together with a decent 3% dividend yield, should help limit downside risks to the stock. Meanwhile, we expect DBS shares to continue to trend up on (1) earnings delivery, (2) BV growth and (3) a flight to safety as economic conditions remain uncertain. Downside risks: sustained low interest rate environment, deterioration of asset quality. ^Index Index level RIC Bloomberg Source: HSBC

Straits Times Index 3,356 DBSM.SI DBS SP

Free float (%) Market cap (USDm) Market cap (SGDm) Source: HSBC

72 39,175 53,785

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DBS Group (DBS SP) Commercial Banks 27 July 2015

Financials & valuation: DBS Income statement (SGDm) Year to Interest income Interest expense Net interest income Net fees & commissions Other income Operating income Operating expense Pre-prov op profit (PPOP) Provision charges Associates & amortization Non-op items Profit before tax Core profit before tax Taxation Minorities + preferences Attributable profit Core earnings Balance sheet summary (SGDm) Ordinary equity Customer loans (Net) Investment in securities Customer deposits Debt issued Interest earning assets Interest bearing liabilities Total assets Capital (%) RWA (SGDm) Fully loaded equity Tier 1 CAR Per share data (SGD) Core EPS Diluted core EPS DPS NTA BV Valuations PE (x) P / PPOP (x) P/NTA (x) P/BV (x) Dividend yield (%)

Buy

12/14a 8,948 (2,627) 6,321 2,027 1,270 9,618 (4,330) 5,288 (667) 79 198 4,898 4,700 (713) (148) 4,037 3,839

12/15e 10,547 (3,149) 7,398 2,432 1,524 11,355 (4,850) 6,505 (1,012) 80 5,573 5,573 (836) (148) 4,589 4,589

12/16e 12,267 (3,713) 8,554 2,919 1,676 13,149 (5,383) 7,766 (1,429) 80 6,417 6,417 (963) (148) 5,307 5,307

12/17e 13,407 (4,054) 9,353 3,211 1,844 14,407 (5,868) 8,540 (1,742) 80 6,878 6,878 (1,032) (148) 5,698 5,698

36,905 275,588 67,457 317,173 36,628 404,825 369,977 440,666

39,994 302,741 70,830 370,960 38,459 464,438 426,404 501,845

43,594 332,269 74,371 408,056 40,382 508,004 466,272 547,053

47,380 364,555 78,090 448,862 42,401 555,607 509,989 596,374

264,186 11.9% 15.3%

301,107 11.4% 14.9%

328,232 11.5% 14.8%

357,825 11.7% 13.6%

1.56 1.56 0.58 12.85 14.92

1.85 1.85 0.65 14.10 16.17

2.14 2.14 0.75 15.55 17.62

2.30 2.30 0.81 17.08 19.15

14x 10.0x 1.7x 1.4x 2.7%

12x 8.2x 1.5x 1.3x 3.0%

10x 6.8x 1.4x 1.2x 3.5%

9x 6.2x 1.3x 1.1x 3.8%

Price relative 23 22 21 20 19 18 17 16 15 14 13 2013

2014 DBS Group

Source: HSBC

2

2015 Rel to STRAITS TIMES INDEX

23 22 21 20 19 18 17 16 15 14 13 2016

Financial ratios and assumptions (%) Year to 12/14a Gross yield 2.38 Cost of funds 0.75 Net interest margin 1.68 Non-int inc/operating inc 34.3 Net loans/deposits 86.9 Cost/operating income ratio 45.0 Cost/average assets 1.0 Net provision/ avg net loans 0.3 Gross NPLs/loans 0.9 Loan loss coverage 147.4 Effective tax rate 14.6 Core ROA 0.91 Core ROE 10.9 Growth (Y-o-Y, %) Earning assets 9.9 Total assets 9.6 Gross loans 10.7 Deposits 15.3 Net interest income 13.5 Non-interest income (1.8) Operating income 7.7 Total cost 10.5 Provision charges (13.4) Pre-provision profit 5.6 Core PBT 8.8 Core net profit 9.9 Core EPS 9.1 DPS (0.4) BVPS 9.1 ROE Decomposition Net Interest Income 1.50 Non-Interest Income 0.78 Operating Income 2.28 Operating Expenses (1.03) PPOP 1.26 Provisions (0.16) Non-op items 0.07 Op Inc before Tax 1.16 Taxation (0.17) Minorities & pref div (0.04) Attributable profit 0.96 Leverage 12.0x ROE 11.5 Source: Company data, HSBC estimates

12/15e 2.43 0.79 1.70 34.8 81.6 42.7 1.0 0.4 1.2 117.5 15.0 0.98 11.9

12/16e 2.52 0.83 1.76 34.9 81.4 40.9 1.0 0.5 1.4 116.5 15.0 1.01 12.7

12/17e 2.52 0.83 1.76 35.1 81.2 40.7 1.0 0.5 1.5 125.6 15.0 1.00 12.5

14.7 13.9 10.0 10.0 17.0 20.0 18.1 12.0 51.7 23.0 18.6 19.5 18.8 12.3 8.4

9.4 9.0 10.0 10.0 15.6 16.1 15.8 11.0 41.2 19.4 15.1 15.6 15.6 15.6 9.0

9.4 9.0 10.0 10.0 9.3 10.0 9.6 9.0 21.9 10.0 7.2 7.4 7.4 7.4 8.7

1.57 0.84 2.41 (1.03) 1.38 (0.21) 0.02 1.18 (0.18) (0.03) 0.97 12.3x 11.9

1.63 0.88 2.51 (1.03) 1.48 (0.27) 0.02 1.22 (0.18) (0.03) 1.01 12.5x 12.7

1.64 0.88 2.52 (1.03) 1.49 (0.30) 0.01 1.20 (0.18) (0.03) 1.00 12.6x 12.5

Priced at close of 24 July 2015

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DBS Group (DBS SP) Commercial Banks 27 July 2015

Fig 1: DBS: 2Q15 results SGDm, year-end Dec

2Q14

3Q14

Interest income Interest expense Net interest income Non-interest income Operating income Operating costs Pre-provision profit Provisions Associates & Amortization Exceptionals Pre-tax profit Core pre-tax profit Tax Minorities Net profit Core net profit

2,218 2,266 2,335 2,380 2,396 (661) (664) (661) (690) (653) 1,557 1,602 1,674 1,690 1,743 756 912 666 1,046 947 2,313 2,514 2,340 2,736 2,690 (1,054) (1,109) (1,126) (1,181) (1,218) 1,259 1,405 1,214 1,555 1,472 (128) (177) (211) (181) (137) 51 6 9 4 10 136 1,182 1,234 1,012 1,514 1,345 1,182 1,234 1,012 1,378 1,345 (180) (193) (141) (215) (197) (33) (33) (33) (30) (31) 969 1,008 838 1,269 1,117 969 1,008 838 1,133 1,117

Key financial ratios Gross NPL Loan Loss Coverage Net provisions / Avg net loans Net loans / Deposits Gross loan growth y-o-y Gross loan growth q-o-q Deposit growth y-o-y Deposit growth q-o-q CASA / Total deposits Assets / Equity (x) Fully loaded Equity Tier I RWCAR Core ROE PPOP ROE Core ROA PPOP ROA Non-int inc / Total inc Cost income ratio Effective tax rate Yield on earning assets Cost of funds Net interest margin

0.89% 147% 0.20% 86% 9% 2% 9% -1% 56% 11.8x 12.2% 15.7% 11.0% 14.4% 0.93% 1.20% 33% 46% 15% 2.38% 0.76% 1.67%

0.91% 145% 0.27% 86% 8% 2% 7% 2% 55% 11.8x 12.1% 15.6% 11.3% 15.8% 0.96% 1.34% 36% 44% 16% 2.38% 0.75% 1.68%

4Q14

0.87% 147% 0.31% 87% 11% 5% 8% 4% 57% 11.9x 11.9% 15.3% 9.2% 13.3% 0.77% 1.12% 28% 48% 14% 2.38% 0.73% 1.71%

1Q15

0.88% 147% 0.26% 87% 11% 2% 8% 2% 58% 11.9x 12.2% 15.3% 12.0% 16.5% 1.01% 1.39% 38% 43% 14% 2.37% 0.74% 1.69%

2Q15 y-o-y % q-o-q % 6M14

0.88% 147% 0.20% 92% 9% 0% 2% -6% 60% 11.5x 12.3% 15.3% 11.6% 15.3% 1.00% 1.31% 35% 45% 15% 2.41% 0.71% 1.75%

8% -1% 12% 25% 16% 16% 17% 7% -80% NM 14% 14% 9% -6% 15% 15%

1% -5% 3% -9% -2% 3% -5% -24% 150% NM -11% -2% -8% 3% -12% -1%

6M15

4,347 4,776 (1,302) (1,343) 3,045 3,433 1,719 1,993 4,764 5,426 (2,095) (2,399) 2,669 3,027 (279) (318) 64 14 198 136 2,652 2,859 2,454 2,723 (379) (412) (73) (61) 2,200 2,386 2,002 2,250 0.89% 147% 0.22% 86% 9% 2% 9% -1% 56% 11.8x 12.2% 15.7% 11.6% 15.5% 0.98% 1.30% 36% 44% 15% 2.37% 0.76% 1.66%

y-o-y % 10% 3% 13% 16% 14% 15% 13% 14% -78% NM 8% 11% 9% -16% 8% 12%

0.88% 147% 0.23% 92% 9% 0% 2% -6% 60% 11.5x 12.3% 15.3% 12.0% 16.1% 1.02% 1.37% 37% 44% 15% 2.39% 0.72% 1.72%

Source: Company, HSBC

3

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DBS Group (DBS SP) Commercial Banks 27 July 2015

Fig 2: DBS: Loan growth and composition % SGDm, year-end Dec Manufacturing Building & construction Housing General commerce Transport & communications Financial institutions Professionals Others Gross loans SGDm, year-end Dec Spore HK Rest of Greater China South & SE Asia Rest of the World Gross loans

2Q14

3Q14

4Q14

1Q15

31,487 32,907 33,024 35,151 44,790 45,450 48,712 50,917 50,816 51,752 52,866 53,931 54,826 55,368 56,658 52,959 21,475 22,204 23,650 24,070 14,475 14,203 16,168 16,925 21,727 21,374 23,849 24,244 21,162 21,946 24,227 26,301 260,758 265,204 279,154 284,498 2Q14

3Q14

4Q14

1Q15

2Q15 33,269 51,602 54,604 54,192 24,125 15,951 24,267 25,713 283,723 2Q15

123,410 125,148 129,167 130,809 129,819 44,919 46,848 49,881 53,417 53,301 48,656 49,097 50,865 48,984 48,357 23,303 23,573 25,446 26,490 27,345 20,470 20,538 23,795 24,798 24,901 260,758 265,204 279,154 284,498 283,723

Q-o-q Y-o-y Q-o-q SGDm SGDm %

Y-o-y Composition % %

(1,882) 1,782 685 6,812 673 3,788 1,233 (634) 55 2,650 (974) 1,476 23 2,540 (588) 4,551 (775) 22,965

6% 15% 7% -1% 12% 10% 12% 22% 9%

-5% 1% 1% 2% 0% -6% 0% -2% 0%

Q-o-q Y-o-y Q-o-q SGDm SGDm % (990) 6,409 -1% (116) 8,382 0% (627) (299) -1% 855 4,042 3% 103 4,431 0% (775) 22,965 0%

12% 18% 19% 19% 9% 6% 9% 9% 100%

Y-o-y Composition % % 5% 46% 19% 19% -1% 17% 17% 10% 22% 9% 9% 100%

Source: Company, HSBC

Fig 3: DBS: Balance sheet SGDm, year-end Dec

2Q14

3Q14

4Q14

1Q15

2Q15

Cash & placements with central banks Due from banks Investment in securities Net loans Other assets Associates Goodwill and intangible assets Property & other fixed assets Total assets

15,195 42,805 68,934 257,355 25,726 995 4,835 1,430 417,275

19,656 38,686 70,615 261,681 26,473 998 4,835 1,439 424,383

19,517 42,263 67,457 275,588 28,244 995 5,117 1,485 440,666

22,653 36,939 74,435 280,808 34,217 996 5,118 1,481 456,647

17,015 28,882 78,969 280,071 27,741 986 5,117 1,476 440,257

Deposits of non-bank customers Due to banks Debt issued Non-int bearing liabilities Total liabilities

299,399 15,776 32,869 30,493 378,537

304,982 12,518 36,482 31,128 385,110

317,173 16,176 36,628 30,483 400,460

324,480 15,901 36,751 37,794 414,926

305,913 18,509 39,696 34,546 398,664

Minority interests Share capital Preferred equity Other reserves S/holders funds & minorities

2,550 9,922 803 25,463 38,738

2,523 10,170 803 25,777 39,273

2,498 10,171 803 26,734 40,206

2,532 10,247 803 28,139 41,721

2,425 10,263 803 28,102 41,593

Source: Company, HSBC

4

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DBS Group (DBS SP) Commercial Banks 27 July 2015

Fig 4: DBS: NPL trends NPL trends

2Q14

3Q14

4Q14

1Q15

2Q15

Q-o-q % Y-o-y %

Gross NPL, by geography Singapore Hong Kong Rest of Greater China South and South-east Asia Rest of the world Total gross NPL Non-performing debt securities & others Total gross NPA

422 223 289 819 564 2,317 113 2,430

414 251 318 944 498 2,425 100 2,525

428 265 342 906 478 2,419 94 2,513

469 296 374 851 513 2,503 87 2,590

512 340 356 777 500 2,485 86 2,571

9% 15% -5% -9% -3% -1% -1% -1%

21% 52% 23% -5% -11% 7% -24% 6%

Gross NPL, by industry Manufacturing Building & construction Housing General commerce Transport & communications Financial institutions Professionals Others Total gross NPL

544 382 110 387 331 251 157 155 2,317

622 440 110 408 336 139 161 209 2,425

660 357 113 434 338 106 166 245 2,419

673 360 116 475 340 114 175 250 2,503

620 341 114 473 363 111 183 280 2,485

-8% -5% -2% 0% 7% -3% 5% 12% -1%

14% -11% 4% 22% 10% -56% 17% 81% 7%

Gross NPL ratio, by geography Singapore Hong Kong Rest of Greater China South and South-east Asia Rest of the world Total gross NPL

0.34% 0.50% 0.59% 3.51% 2.76% 0.89%

0.33% 0.54% 0.65% 4.00% 2.42% 0.91%

0.33% 0.53% 0.67% 3.56% 2.01% 0.87%

0.36% 0.55% 0.76% 3.21% 2.07% 0.88%

0.39% 0.64% 0.74% 2.84% 2.01% 0.88%

Gross NPL ratio, by industry Manufacturing Building & construction Housing General commerce Transport & communications Financial institutions Professionals Others Total gross NPL

1.73% 0.85% 0.22% 0.71% 1.54% 1.73% 0.72% 0.73% 0.89%

1.89% 0.97% 0.21% 0.74% 1.51% 0.98% 0.75% 0.95% 0.91%

2.00% 0.73% 0.21% 0.77% 1.43% 0.66% 0.70% 1.01% 0.87%

1.91% 0.71% 0.22% 0.90% 1.41% 0.67% 0.72% 0.95% 0.88%

1.86% 0.66% 0.21% 0.87% 1.50% 0.70% 0.75% 1.09% 0.88%

Source: Company, HSBC

Fig 5: DBS: Loan deposit ratios by currency % SGD

180%

HKD

USD

RMB

160% 140% 120% 100% 80% 60%

2Q15

4Q14

2Q14

4Q13

2Q13

4Q12

2Q12

4Q11

2Q11

4Q10

2Q10

4Q09

2Q09

4Q08

2Q08

40%

Source: Company, HSBC

5

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DBS Group (DBS SP) Commercial Banks 27 July 2015

DBS: Quarterly trends Fig 6: DBS: Loan and deposit growth y-o-y % Loan growth YoY%

30%

Fig 7: DBS: Net loans-to-deposits %

Deposit growth YoY%

90%

25%

85%

20%

80%

15%

75%

Source: Company, HSBC

Fig 8: DBS: Net interest margin %

Fig 9: DBS: Non-interest income / Total income % NIM%

1Q15

Non-interest income/Total income

55%

2.2%

1Q14

1Q13

1Q12

1Q11

1Q10

1Q09

1Q08

1Q07

Source: Company, HSBC

2.3%

50%

2.1%

Source: Company, HSBC

1Q15

Credit cost/Avg net loans

1.5% 1.3% 1.1% 0.9% 0.7% 0.5% 0.3%

Source: Company, HSBC

1Q12

1Q11

1Q10

1Q09

1Q08

-0.3%

1Q07

0.1% -0.1%

1Q06

1Q15

1Q14

1Q13

1Q12

1Q11

1Q10

1Q09

1Q08

1Q07

1Q06

1Q05

1Q04

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%

1Q05

Gross NPL (RHS)

1Q04

Loan loss coverage (LHS) 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60%

1Q14

Fig 11: DBS: Credit cost / Average net loans %

1Q15

Fig 10: DBS: Gross NPL ratio and Loan loss coverage %

1Q14

Source: Company, HSBC

1Q13

1Q12

Source: Company, HSBC

1Q13

1Q11

1Q10

1Q09

1Q08

1Q07

1Q06

1Q04

1Q15

1Q14

1Q13

1Q12

20%

1Q11

1.5%

1Q10

25%

1Q09

1.6%

1Q08

30%

1Q07

35%

1.7%

1Q06

1.8%

1Q05

40%

1Q04

1.9%

1Q05

45%

2.0%

6

1Q06

-10%

1Q05

55%

1Q04

1Q15

1Q14

1Q13

1Q12

1Q11

1Q10

1Q09

1Q08

1Q07

60%

1Q06

65%

0%

1Q05

70%

5%

1Q04

10%

-5%

Net loan-deposit ratio

95%

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DBS Group (DBS SP) Commercial Banks 27 July 2015

Fig 13: DBS: PPOP ROA and ROA %

1Q15

1Q14

1Q13

1Q12

1Q11

Core RoA

1Q10

1Q07

1Q15

Source: Company, HSBC

1Q06

0.5%

1Q04

7%

1Q14

0.7%

1Q13

9%

1Q12

0.9%

1Q11

1.1%

11%

1Q10

13%

1Q09

1.3%

1Q08

1.5%

15%

1Q07

17%

1Q06

1.7%

1Q05

19%

1Q04

PPoP RoA

1.9%

1Q09

Core RoE

1Q05

PPoP RoE

21%

1Q08

Fig 12: DBS: PPOP ROE and Core ROE %

Source: Company, HSBC

Valuations Fig 14: DBS: One-year forward PB (x) 2.4x 2.2x 2.0x 1.8x 1.6x Avg: 1.2x 1.4x 1.2x 1.0x 0.8x 0.6x

Fig 15: DBS: One-year forward PE (x) 20x 18x 16x

+1SD: 1.5x

+1SD: 14x

14x

Avg: 11x

12x 10x

-1SD: 0.8x

8x

-1SD: 9x

Source: Bloomberg, HSBC

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-14

Jan-12

Jan-10

Jan-08

Jan-06

Jan-04

Jan-02

Jan-00

6x

Source: Bloomberg, HSBC

Fig 16: SG banks: Sector valuation table Bank

Rec

DBS Buy OCBC Hold UOB Buy Sector avg

24-Jul Target price price 21.40 10.44 23.41

25.00 11.30 26.95

___ PBx ____ 15e 16e

__ RoE% ___ Div yield % 15e 16e 15e 16e

P/PPOP x 15e 16e

2014-16e Mkt Avg trdg _ PEx ___ core EPS cap value 15e 16e CAGR % USDb USDm

1.32 1.30 1.27 1.30

11.9 12.3 12.1 12.3

8.2 8.0 7.7 7.9

11.6 10.9 10.9 11.0

1.21 1.21 1.16 1.18

12.7 11.5 12.5 12.4

3.0 3.7 3.2 3.3

3.5 3.7 3.6 3.6

6.8 7.6 6.8 7.0

10.0 10.9 9.8 9.9

17 2 13

39 31 27

54 34 39

Source: Bloomberg, HSBC

Valuation and risks DBS (DBS SP, SGD21.08, Buy, TP SGD25.00): We base our target price of SGD25.00 on an intrinsic PB multiple derived from a Gordon growth model. Our target price assumes a 12.6% sustainable ROE, a 9.5% cost of equity, and a 4% growth rate. This implies a 1.6x December 2015e BV and 13.5x 2015e EPS. Our target price implies 16.8% upside potential; we rate the shares Buy. Key downside risks to our rating and estimates include a sustained low interest rate environment and potential deterioration of asset quality.

7

DBS Group (DBS SP) Commercial Banks 27 July 2015

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Kar Weng Loo

Important disclosures Equities: Stock ratings and basis for financial analysis

HSBC believes an investor’s decision to buy or sell a stock should depend on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts’ views and the basis for the rating. From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce. Our ratings are re-calibrated against these bands at the time of any ‘material change’ (initiation or resumption of coverage, change in target price or estimates). Upside/Downside is the percentage difference between the target price and the share price. Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral. *A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month’s average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock’s status to change.

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DBS Group (DBS SP) Commercial Banks 27 July 2015

Rating distribution for long-term investment opportunities As of 27 July 2015, the distribution of all ratings published is as follows: Buy 42% (30% of these provided with Investment Banking Services) Hold

42%

(28% of these provided with Investment Banking Services)

Sell

16%

(19% of these provided with Investment Banking Services)

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

Share price and rating changes for long-term investment opportunities DBS Group (DBSM.SI) share price performance SGD vs HSBC rating history

Recommendation & target price history From

24 22 20 18 16 14 12 10 8 6

Jul-15

Jul-14

Jul-13

Jul-12

Jul-11

Jul-10

Overweight Neutral Overweight Target price Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9

To

Date

Neutral Overweight Buy Value

5 August 2012 10 July 2013 25 March 2015 Date

16.00 17.00 18.65 18.50 19.80 19.00 19.25 24.80 25.00

5 August 2012 26 April 2013 2 May 2013 11 July 2013 1 August 2013 15 January 2014 16 February 2014 23 July 2014 28 October 2014

Source: HSBC Source: HSBC

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DBS Group (DBS SP) Commercial Banks 27 July 2015

HSBC & Analyst disclosures Disclosure checklist Company DBS GROUP

Ticker

Recent price

Price date

Disclosure

DBSM.SI

21.40

24-Jul-2015

6, 7

Source: HSBC

1 2 3 4 5 6 7 8 9 10 11

HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 30 June 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 31 May 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 31 May 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. As of 31 May 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. Whether, or in what time frame, an update of this analysis will be published is not determined in advance. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures 1 2 3

10

This report is dated as at 27 July 2015. All market data included in this report are dated as at close 24 July 2015, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

DBS Group (DBS SP) Commercial Banks 27 July 2015

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