DBS Group - OCBC Investment 2022-02-14: 4Q21 Dividends Raised


DBS Group - 4Q21 Dividends Raised

  • DBS's FY2021 net profit of S$6.8bn grew 44% y-o-y, reflecting continued recovery in business momentum.
  • DBS's 4Q21 quarterly dividend per share was increased 9% to 36 cents, surprising positively and signaling management confidence in the bank’s growth outlook.
  • DBS's 2022 guidance reflects a constructive outlook ahead, driven by mid to high single-digit loan growth, double-digit fee income growth and improvement in NIMs, which should help mitigate higher expense and potential uptick in credit risks amid a rising rate and inflationary environment.

DBS's 4Q21 results

  • DBS (SGX:D05)'s 4Q21 net profit of S$1.39bn increased 37% y-o-y, supported by continued business momentum and lower allowances. Net profit fell 18% q-o-q due to seasonally lower non-interest income and smaller general allowance writeback. Net interest income grew 2% q-o-q, supported by 1% q-o-q growth in loans and stable net interest margin (NIM) of 1.43%. Loans grew 9% y-o-y in 4Q, with non trade corporate loans led by Singapore and Hong Kong, while consumer loans was up S$2bn, driven by higher housing and wealth management loans. Non interest income declined 21% partly due to seasonal effects. Profit before allowances of S$1.62bn fell 14% q-o-q due to seasonally lower fee income and trading income.
  • 4Q21 dividend was raised, signaling confidence in DBS’s growth outlook - With capital levels remaining strong (CET1 ratio at 14.4%, at the upper end of its target operating range of 12.5-13.5%), 4Q21 dividend per share was raised 3 cents to 36 cents per share (subject to approval at the next AGM on 31 March 2022, no scrip applies), which surprised positively and brings full year 2021 dividend to S$1.20/share.

DBS's FY20 full year results highlights:

  • DBS's 2021 net profits of S$6.8bn gained 44% from a year ago (largely in line), benefiting from accelerated business momentum from pandemic disruptions in the previous years. Return on equity improved to 12.5% (vs 9.1% a year ago). CASA ratio was a record 76%, supported by sustained deposit growth.
  • For FY21, loans growth was a positive, increasing to 9% (highest in seven years), while fee income and treasury markets income also reported record levels. Overall net interest income however was subdued in 2021, declining 7% due to negative impact of rate cuts which more than offset the 9% loans growth. For non interest income, fee income was up a solid 15%, led by wealth management (contributed ~44% of fee income) and transaction banking (~23% of fee income), investment banking fees (~5% of fee income), while card spending (~18% of fee income) normalised and surpassed pre-COVID levels. Other income fell 5% as trading income was offset by lower investment gains from a high base.
  • Expenses increased 5% in 2021, within which staff expenses grew 9% y-o-y, accounting for two thirds of total expenses. Underlying expenses (excluding costs related to amalgamation of Lakshmi Vilas Bank and previous year’s government grants) increased a more modest 1% in FY21, while cost income ratio was 45% (4Q21: 51%, increased from 47% in 3Q21), increased from 42% in FY20.
  • Asset quality and balance sheet remains resilient, with new NPA formation improving to pre-COVID levels. FY21 non performing loans (NPL) rate improved further from 1.5% to 1.3%, helped by two significant repayments as non performing assets (NPA) fell 11% on quarter (or ~S$0.72bn). Full year GP writeback was S$447mil from repayments, credit upgrades and transfers to non performing assets, with overlays maintained and SP was 12bps of loans (below pre-pandemic). CET1 ratio ended the year at 14.4% - the combined impact of higher regulatory penalty by MAS and Citi Taiwan retail acquisition is likely to lower CET1 ratio by 1.1ppt, which remains within its target operating range.
  • Rectification actions are currently being taken to address the two day disruption to its online banking services during 23-25 November 2021, which resulted in higher regulatory capital penalty of S$930mil imposed by the MAS (multiplier of 1.5x applied to its risk weighted assets for operational risk, manageable impact expected on CET1 of ~40bps), with independent experts to be appointed to review the incident and rectify shortcomings before the raised capital requirement may be reviewed (which may provide potential upside for future distributions).

Guidance for 2022 remains constructive, with upside from rising rates and a diversified franchise strengthened by recent inorganic transactions and improved digital capabilities.

  • Management shared its NIM sensitivity is estimated at S$18-20mil of net interest income for every 1bps US rate hike. Similar to global banks, some expense growth is expected in 2022, which DBS believes will be slightly above 2021. Asset quality is expected to remain supportive (moderate credit impact from higher rates expected, SME portfolio has been stressed tested and secured), with allowances expected to be similar to 2021 levels barring unforeseen circumstances.
  • The bank targets mid-single digit loan growth and double-digit fee income growth, although it flags potential risks from US market selloff and China slowdown. While there may be more headwinds for the SME segment amid a higher rate and inflationary environment, management remains comfortable on the stress tests and collateral taken in the segment. In addition, the bank is also positive on the growth prospects of its Wealth management business, where AUM increased 10% last year to S$291bn and total income of S$2.73bn declined a modest ~5% y-o-y.

HOLD rating following solid double-digit share price gains year to date, which has underscored our prior calls to add positions

  • DBS's share price has rallied quickly this year on higher rate expectations, underscoring our prior calls to add positions. While valuations have extended, our constructive stance is maintained given multiple earnings drivers ahead from rates and a favourable macro backdrop as regional economies ease towards a post-COVID-19 world.
  • We remain positive on DBS’s ongoing efforts on various new business drivers, which bodes well for its medium term growth prospects and should support continued improvement in ROEs as the economic recovery strengthens further.
  • As highlighted in our earlier reports, the Fed’s new rate hike cycle starting this year has positive implications for rate sensitive Singapore banks’ net interest margins and earnings outlook. In addition, the sector has a relatively high mix of floating rate assets, which should be repriced higher as interbank rates increase.
  • See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-02-14
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