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


DBS Group - Payout Superstar?

Operational resilience, excess capital could raise dividend

  • 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.

NIMs set to accelerate

  • 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.

Watch asset quality, costs

  • 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.

Structurally higher dividend potential. Maintain BUY

  • 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