DBS Group - Phillip Securities 2022-08-05: Higher Net Interest Income Support Profits


DBS Group - Higher Net Interest Income Support Profits

  • DBS (SGX:D05)'s 2Q22 earnings of S$1.82bn in line with our estimates due to higher net interest income offset by lower fee income and other non-interest income. 1H22 PATMI is 47% of our FY22e forecast. DBS's 2Q22 dividend up 9% y-o-y at S$0.36.
  • Net-interest maring (NIM) increased 13bps y-o-y to 1.58% and loan growth of 7% y-o-y lifted net-interest income (NII). NIM grew 12bps q-o-q. Fee income fell 12% y-o-y and other non-interest income dropped 10% y-o-y due to weaker market sentiment.
  • Maintain BUY recommendation on DBS with an unchanged target price of S$41.60. Our FY22e estimates remain unchanged.
  • For FY22e, management guided benign provisions, stable growth in loans and improved NIMs. We believe there is upside to the NIM guidance. A 50bps move in interest can raise earnings by 13%.

The Positives

NII up 17% y-o-y.

  • NII grew 17% y-o-y to S$2.5bn due to NIM increase of 13bps y-o-y to 1.53% and continued loan growth of 7% y-o-y.
  • Loan growth was driven by trade and corporate non-trade loans, while housing loans and wealth management loans were little changed.
  • NIM improvement was mainly due to the rising interest rates as the impact of interest rate hikes was more fully felt. Management has lifted NIM guidance to 1.70-1.75% for FY22e (from 1.58-1.60%).

Asset qualitystable; 2Q22 allowances at S$46mil.

  • 2Q22 total allowances were lower y-o-y and q-o-q due to lower specific provisions (SP) of S$69mil for the quarter (S$167mil in 1Q22).
  • Further, credit costs improved by 6bps y-o-y to 8bps. The general provisions (GP) write-back of S$23mil for 2Q22 was from credit upgrades and transfers to non-performing assets (NPA). GP reserves remained prudent at S$3.74bn, with NPA reserves at 113% and unsecured NPA reserves at 199%. The non-performing loan (NPL) ratio was maintained at 1.3% as new NPA formation remained low.

Loan growth up 7%; deposits up 9% y-o-y in 2Q22.

  • Loans grew 7% y-o-y and 1% q-o-q to S$425bn. This was mainly driven by trade and corporate non-trade loans. Housing and Wealth Managemebt loan growth was sustained at the previous quarter’s levels. Management lowered its FY22e loan growth guidance to mid-single digit (from mid to high-single digit). Deposits grew 9% y-o-y and 1% q-o-q to S$528bn, and current and savings accounts (CASA) accounted for 72% of customer deposits.

The Negative

Fee income fell 12% y-o-y.

  • The fee income decline y-o-y was mainly due to weaker market sentiment affecting wealth management and investment banking. Wealth management fees fell 21% y-o-y to S$337mil as market conditions further weakened during the quarter.
  • Investment banking fees fell by 54% y-o-y to S$30mil alongside a slowdown in capital market activities.
  • Nonetheless, card fees improved 23% y-o-y to S$203mil as borders start to reopen and spending increased, while loan-related fees moderated from record levels.
  • Other non-interest income fell 10% due to less favourable market opportunities.


Business momentum is strong:

  • Despite economic uncertainties from macroeconomic factors such as slower growth, higher inflation and supply chain disruptions, loans and transaction pipelines are expected to be strong. Management said that stress tests of vulnerable sectors and countries reveal no imminent areas of concern.

GP reserves sufficient:

  • With its capital position and liquidity well above regulatory requirements and high allowance reserves, we believe the bank has sufficient provisions to ride out current economic uncertainties. The CET-1 ratio improved 0.2% q-o-q to 14.2% and is at the upper end of DBS’ target operating range. 2Q22 dividend is raised 9% y-o-y to S$0.36.

Upside from higher rates:

  • Management said that it expects to end 2022 with an exit NIM of 2.0%. DBS said that a 1 bps rise in interest rates could raise NII by $18mil-20mil (or NII sensitivity of 2% for every 10bps). Assuming hikes of 100bps this year, our FY22e NII can climb S$2bn (or 21%) resulting in an increase in our FY22e PATMI by 26%.

Maintain BUY with unchanged target price of S$41.60.

Glenn Thum Phillip Securities Research | https://www.stocksbnb.com/ 2022-08-05
SGX Stock Analyst Report BUY MAINTAIN BUY 41.600 SAME 41.600