DBS Group - Maybank Research 2022-08-04: Payout Superstar?

DBS GROUP HOLDINGS LTD (SGX:D05)

DBS Group - Payout Superstar?

DBS (SGX:D05) missed 1H22 expectations on lower than expected interest income. This is set to turnaround and accelerate in 2H as asset re-pricing picks up. Asset quality is a key risk, but DBS’s strong portfolio and provisioning offers a buffer.

We believe there are significant upside risks to dividend payouts going forward as DBS looks to return excess capital.
A potential China re-opening, continued execution in India and a turnaround in wealth fees are near term catalysts. We raise target price for DBS to S$42.18. BUY.

DBS’ 2Q22 net-interest margins (NIM) expanded 12bps y-o-y. Given its superior funding advantage (66% CASA vs 58% peers), we expect a faster rise in 2H22. Indeed, Management claims July NIMs have reached 1.8% (+22bps higher vs 2Q) as Fed rate hikes, higher HIBOR in HK and mortgage repricing feeds through. We have raised 2022E NIM assumption by a further 6bps.
On the other hand, slower macro could have an impact on DBS's loan growth. We have lowered 2022E assumptions by 60bps to 7% y-o-y.
On Non-Interest Income, Management claims fee income has bottomed. We note AUM has expended 3% y-o-y, pointing to upside risks to wealth fees, but this would be conditional on better macro clarity, in our view.

Non-performing loans (NPL) were flat h-o-h at 1.3%, although there were notable escalations in Hongkong (+17% y-o-y) and China (+15%). Management claims exposure to domestic Mainland property developers are negligible and stress tests conducted on their portfolios point to resilience at current provisioning levels.
Nevertheless, rising rate and input costs heightens delinquency risks going forward, in our view. We increase provision costs by 10%-60% in 2022-24E.
Separately, the 2Q22 cost-to-income ratio expanded to 44% vs 43% a year ago. Management is guiding for this to fall closer to 40% by year-end. Given rising wage costs and technology expenses, we take a more conservative view and expect a material drop only in 2023E.

DBS’s CET1 of 14.2% is above the upper end of its guided range of 12.5%-13.5%. As such, we estimate DBS is carrying ~S$2.4bn of excess capital.
With two large deals (LVB India, Citi Taiwan) to digest, we do not believe DBS would have the appetite for sizable M&A in the medium term. As such, there is upside risks to higher dividends going forward.
We raise 2022-24E dividend payout ratios assumption for DBS by 3-7ppts.
See
We have lowered 2022- 24E earnings forecast for DBS by 5-9%. We roll forward our multi-stage DDM (COE 9.3%, 3% terminal) to 2023E, and raise target price for DBS to S$42.18 (from S$41.22). BUY.

Thilan Wickramasinghe Maybank Research | https://www.maybank-ke.com.sg/ 2022-08-04

SGX Stock Analyst Report BUY MAINTAIN BUY 42.18 UP 41.220