DBS Group - UOB Kay Hian 2022-11-04: 3Q22 Higher MIN & Lower CIR Pushing ROE Higher


DBS Group - 3Q22 Higher MIN & Lower CIR Pushing ROE Higher

  • DBS achieved record high net profit of S$2,236m (+32% y-o-y) in 3Q22. While NIM has expanded by a massive 47bp y-o-y, management has understandably toned down guidance on NIM expansion due to migration to fixed deposits.
  • Asset quality has improved with NPL ratio at 1.2% and management overlay for general provisions at S$2.1b as of end-Sep 22. ROE would be comfortably above 15% in 2023.
  • DBS will review its dividend policy to hike dividend in 2023. Maintain BUY recommendation on DBS with target price S$45.00.

DBS's 3Q22 Earnings

  • DBS (SGX:D05) reported net profit of S$2,236m for 3Q22, up 32% y-o-y and 23% q-o-q. The results are above our net profit forecast of S$2,012m.
  • Massive NIM expansion with strong pass-through to domestic interest rate. Loan growth was 6% y-o-y and 1% q-o-q in 3Q22, driven by a broad-based expansion of non-trade corporate loans across the region. Disbursement of residential mortgages has also picked up. NIM expanded by a sizeable 47bp y-o-y and 32bp q-o-q to 1.90%.
  • CASA ratio deteriorated by 6.6ppt q-o-q to 65.7%. DBS lost CASA (current accounts and savings accounts) of S$32b q-o-q, while fixed deposits correspondingly expanded S$37b q-o-q as domestic interest rates surged in tandem with higher Fed Funds Rate.
  • Wealth management a drag on fee income. DBS's fees & commissions dropped 13% y-o-y in 3Q22. Contribution from wealth management declined 13% y-o-y. Contributions from loans-related activities and cards grew 7% and 10% y-o-y respectively.
  • Higher treasury income. DBS's other non-interest income expanded 32% y-o-y to S$753m in 3Q22 due to higher treasury customer income, net trading income and investment gains.
  • Cost-to-income ratio improved 3.5ppt y-o-y to 40.2%. Operating expenses increased 9% y-o-y driven by higher staff costs.
  • Asset quality improved. NPL formation remained low at S$278m, while upgrades and repayments were higher at S$411m. Thus, NPL balance dropped 5% q-o-q and NPL ratio eased 0.1ppt q-o-q to 1.2% in 3Q22. Total provisions were higher at S$178m (2Q22: S$46m), comprising mainly general provisions. DBS has added S$350m to management overlay for general provisions, bringing the total to S$2.1b. The management overlay provides a cushion against future stresses on asset quality.
  • ROE at a record high. DBS achieved high ROE of 16.3% for 3Q22. The board has proposed interim dividend of 36 cents for 3Q22.

DBS's guidance for 2023.

  • DBS's management guided loan growth at mid-single digit for 2023 as its loan pipeline remains healthy. There could be moderation for US dollar-denominated loans as Chinese corporate customers switch to borrowing at lower cost in their onshore market in Mainland China.
  • NIM for DBS is expected to reach 2.25% by mid-23 assuming that the Fed Funds Rate peaks at 4.75%. Fee income is expected to grow at a double-digit rate, led by wealth management and cards. Cost-to-income ratio is likely to fall below 40%. There is a lack of visibility but credit cost is budgeted to normalise higher to 20bp. ROE is projected to be comfortably above 15%.
  • Toned down guidance for NIM expansion at higher interest rate. Management had previously guided that every 1bp increase in Fed Funds Rate would boost net interest income by S$18m-20m per year. This modelling was conducted assuming that the Fed Funds Rate rises to 4%. At higher levels of interest rates, customers start to reposition from CASA to fixed deposits, which results in higher cost of funds. Thus, the estimated sensitivity was halved to S$9m-10m per year when Fed Funds Rate is above 4%.
  • Potential US recession, Asia slowdown. DBS is concerned that idiosyncratic risks may emerge if the Fed Funds Rate rises above 5%, which could tip the US economy into a recession and drag Asia into a slowdown. The reopening of China is expected to be gradual and protracted, materialising over several phases and a few quarters.

DBS to review dividend policy in light of Basel 4.

  • CET-1 CAR eased 0.4ppt q-o-q but remains robust at 13.8%. CET-1 CAR could jump to 16% when Basel 4 is implemented on 1 Jan 24, which provides a comfortable cushion of 2-3ppt above operating range of 12.5-13.5%. Management will conduct a review of DBS's dividend policy. See DBS's Dividend History. DBS could consider returning capital to shareholders through:
    1. increasing the quarterly dividend,
    2. rewarding shareholders with a special dividend, and
    3. share buyback.

Singapore a growing hub for wealth management.

  • DBS’s net new money inflows doubled y-o-y to S$15b in 9M22, driven by North Asia.

DBS – Earnings forecast revision and recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 45.00 DOWN 45.750