We attended DBS’ Investor Day on 22 May 2023 where management shared their digital-led strategy in growth markets, how new businesses with potential have evolved from the previous Investor Day in 2017 and addressed some of the questions from investors and analysts. The key takeaways from DBS Investor Day 2023 are:

• Guidance of a medium-term (3 to 5 years) ROE of 15-17% and a baseline for dividends to increase by 24 cents per year. Further upside of S$3bn based on optimal CET-1 operating range which could be distributed in further ordinary dividend step-up, special dividend or share buyback.
• Technology has transformed the way they manage with the use of a hybrid multi-cloud strategy with in-house infrastructure as a service. Other business segments such as Consumer and SME, Private banking, Global transaction services, and Treasury markets have also benefited from the digital transformation.

Group Financials

• Medium-term ROE of 15-17%, dividends to increase by 24 cents per year. DBS has guided for a medium-term ROE of 15-17%, with the uplift coming from: (a) faster growth in capital-light high-ROE businesses such as wealth management, global transaction services and treasury market sales; (b) increasing ROE with scale in growth markets such as transaction banking, wealth management, SME lending and unsecured retail lending, and; (c) capital headroom to support profitable growth and higher distributions. Notably, ordinary dividends would be lifted by 24 cents to S$1.68 in 2023. There is also a further upside of S$3bn based on the optimal CET-1 operating range of 12.5-13.5% (1Q23: 14.1%), which could be distributed in further ordinary dividend step-up, special dividend or share buyback.
• Group ROE structurally improved by 250bps. ROE improved by 380bps to 15.0% in 2022 (2015: 11.2%) from a 220bps uplift in external drivers and a 250bps increase in structural drivers offset slightly by a 90bps dip in financial leverage. External drivers include higher interest rates, credit cycle and market growth. Structural drivers include extended superior deposit franchise to foreign currency, growth in high-ROE fee income and new capabilities in credit risk management.

• 1Q23 earnings of S$2.57bn were above our estimates due to higher net interest income (NII) and fee income. 1Q23 PATMI is 28% of our FY23e forecast. 1Q23 DPS is raised 17% YoY to 42 cents.
• NII surged 50% YoY to S$3.27bn on NIM expansion of 66bps to 2.12% despite loan growth remaining flat YoY. Fee income decline moderated to 4% YoY and grew 29% QoQ, while other non-interest income grew 39% YoY. DBS lowered its guidance for FY23e, with NIM guidance from 2.10% to 2.05-2.10%; loan growth guidance from mid-single digit to 3-5%; and fee income guidance from double-digit to high-single digit.
• Maintain BUY with an unchanged target price of S$41.60. We maintain FY23e earnings as we lower NII estimates for FY23e due to lower loans growth and NIMs, offset by lower operating expenses and provisions estimates. We assume 1.90x FY23e P/BV and ROE estimate of 16.6% in our GGM valuation.

The Positives

+ NIM and NII continue to increase. NII spiked 50% YoY to S$3.27bn due to a NIM surge of 66bps YoY to 2.12% (2Q22: +12bps, 3Q22: +32bps, 4Q22: +15bps, 1Q23: +7bps) despite loan growth remaining flat YoY. Increases in trade and non-trade corporate loans led by Singapore real estate acquisition financing were offset by lower consumer loans as wealth management loans declined. Management has lowered its NIM guidance from 2.10% to 2.05-2.10% and indicated that NIM has likely peaked in 1Q23 with the NIM decline to be gradual for the rest of 2023 due to an increase in funding costs.

+ Fee income rose 29% QoQ, YoY decline moderated to 4%. Fee income declined 4% YoY (3Q22: -13%, 4Q22: -19%) due to weaker market sentiment affecting wealth management and transaction service fees, which more than offset increases in card and investment banking fees. Nonetheless, fee income saw a recovery of 29% QoQ from broad-based growth. WM fees increased 39% QoQ to S$365mn due partly to seasonal effects, while investment banking fees spiked 91% QoQ to S$44mn from higher equity and debt capital market activity. Loan-related fees surged 80% QoQ to S$142mn, while transaction service fees rose 2% QoQ. However, card fees fell 7% QoQ to S$227mn due to seasonally-higher spending in 4Q22.

+ Other non-interest income rose 35% YoY. Other non-interest income rose 35% YoY and 25% QoQ, mainly due to an increase in treasury customer income and it being a seasonally higher quarter.

The Negatives

- Allowances rose 193% YoY. 1Q23 total allowances were higher 193% YoY due to higher GP of S$99mn for the quarter (1Q22: write- back of S$112mn) offset by a decline in SP to S$62mn (1Q22: S$167mn). Nonetheless, 1Q23 credit costs improved by 9bps YoY to 6bps as there was a decline in new NPLs by 89% to S$17mn for 1Q23. The NPL ratio declined to 1.1% (1Q22: 1.3%) as new NPA formation fell by 53% YoY. GP reserves rose slightly to S$3.83bn, with NPA reserves at 127% and unsecured NPA reserves at 229%.

- CASA ratio decline continues. The Current Account Savings Accounts (CASA) ratio fell 24% YoY to 52.4%, mainly due to the high interest rate environment and a continued move towards fixed deposits (FD). Nonetheless, total customer deposits increased 2% YoY to S$529bn. Management said that deposits and wealth management net new money benefited from flight-to-safety inflows in March 2023.

• 4Q22 earnings of S$2.34bn were above our estimates due to higher net interest income (NII) slightly offset by lower fee income. FY22 PATMI is 104% of our FY22e forecast. 4Q22 DPS was up 17% YoY to 42 cents with an additional special dividend of 50 cents; full-year FY22 dividend rose 67% YoY to 200 cents.
• NII surged 53% YoY to S$3.28bn on NIM expansion of 62bps to 2.05% despite flat loan growth of 1% YoY. Fee income fell 19% YoY due to weaker market sentiment, while other non-interest income surged 119% YoY. 4Q22 ROE increased 7.3% points YoY to 17.2%.
• Maintain BUY with an unchanged target price of S$41.60. We lower FY23e earnings by 3% as we lower NII estimates for FY23e due to lower loans growth, offset slightly by higher fee and other non-interest income. We assume 1.88x FY23e P/BV and ROE estimate of 16.5% in our GGM valuation. Expect another two quarters of strong NII growth. 1H22 NIM was only 1.52% compared to 4Q22’s 2.05%.

The Positives

+ NIM and NII continue to surge. NII spiked 53% YoY to S$3.28bn due to a NIM surge of 62bps YoY to 2.05% (1Q22: +3bps, 2Q22: +12bps, 3Q22: +32bps, 4Q22: +15bps) despite flat loan growth of 1% YoY. Increases in non-trade corporate, housing, and trade loans were offset by lower loans in other segments as some corporates shifted their borrowing to cheaper financing options or repaid opportunistic borrowing. Management has guided for a peak NIM of 2.25% for FY23e with a downside risk of 5-7bps due to outflows to T-bills, strengthening SGD and higher funding costs.

+ Other non-interest income spiked 119% YoY. Other non-interest income surged 119% YoY mainly due to an increase in treasury customer sales to both corporate and wealth management customers, and higher trading gains which more than offset a decline in gains from investment securities.

+ Asset quality stable; 4Q22 allowance write back of S$42mn. 4Q22 total allowances were lower YoY and QoQ due to a higher GP write-back of S$116mn for the quarter (4Q21: write- back of S$34mn, 2Q22: GP of S$153mn), with full-year allowances at S$237mn (FY21: S$52mn). 4Q22 credit costs were flat YoY 6bps while full-year credit costs improved by 4bps YoY to 8bps. GP reserves dipped slightly to S$3.7bn, with NPA reserves at 122% and unsecured NPA reserves at 215%. The NPL ratio declined to 1.1% (4Q21: 1.3%) as new NPA formation remained low and was more than offset by higher upgrades and repayments.

The Negatives

- Fee income fell 19% YoY. The fee income decline YoY was mainly due to weaker market sentiment affecting wealth management and investment banking which more than offset increases in card and loan-related fees. WM fees fell 31% YoY to S$262mn as weaker financial market conditions led to lower investment product sales. Investment banking fees fell by 64% YoY to S$23mn alongside a slowdown in capital market activities. Nonetheless, card fees improved 22% YoY to S$245mn as travel spending continued to recover towards pre-pandemic levels, while loan-related fees were stable at S$79mn.

- CASA ratio declined YoY. The Current Account Savings Accounts (CASA) ratio fell 21% YoY to 60.3% mainly due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 5% YoY to S$527bn. Management said that the drop in CASA was expected and that the increase in FDs was higher than the drop in CASA, hence a net increase in deposits.

• 3Q22 earnings of S$2.24bn in line with our estimates due to higher net interest income (NII) and net interest margins (NIM) slightly offset by lower fee income and higher allowances. 9M22 PATMI is 77% of our FY22e forecast. 3Q22 DPS up 9% YoY at 36 cents.
• NII surged 44% YoY to S$3bn on NIM expansion of 47bps to 1.90% and loan growth of 6% YoY. Fee income fell 13% YoY due to weaker market sentiment while other non-interest income increased 32% YoY. 3Q22 ROE increased 4.2% points YoY to 16.3%.
• Maintain BUY with an unchanged target price of S$41.60. We raise FY22e earnings by 3% as we increase NII estimates for FY22e. We assume 1.77x FY22e P/BV and ROE estimate of 13.6% in our GGM valuation. We raised FY23e earnings by 6% as we increase NII estimates for FY23e. Our ROE estimate for FY23e is raised from 14.7% to 14.9%. A 50bps move in interest can raise earnings by 13%.

The Positives

+ NIM and NII surge. NII grew 44% YoY to S$3.02bn due to NIM increase of 47bps YoY to 1.90% (1Q22: +3bps, 2Q22: +12bps, 3Q22: +32bps) and continued loan growth of 6% YoY. Loan growth was driven by housing and non-trade corporate loans offset by lower trade loans as maturing exposures were not replaced due to unattractive pricing. Management has maintained NIM guidance of 1.75% for FY22e and targets to reach 2% by 4Q22.

+ Other non-interest income up 32% YoY. Other non-interest income was up 32% YoY and QoQ mainly due to higher Treasury Markets non-interest income, treasury customer income and investment gains.

+ Asset quality stable; 3Q22 allowances at S$178mn. 3Q22 total allowances were higher YoY and QoQ due to higher GPs of S$153mn for the quarter (write back of S$23mn in 2Q22). Nonetheless, credit costs improved by 4bps YoY to 2bps as SPs were lower YoY and QoQ at S$25mn. GP reserves rose to S$3.9bn, with NPA reserves at 120% and unsecured NPA reserves at 216%. The NPL ratio declined to 1.2% (3Q21: 1.5%) as new NPA formation remained low and was more than offset by higher upgrades and repayments.

The Negatives

- Fee income fell 13% YoY. The fee income decline YoY was mainly due to weaker market sentiment affecting wealth management and investment banking which more than offset increases in card and loan-related fees. WM fees fell 30% YoY to S$323mn as market conditions further weakened during the quarter. Investment banking fees fell by 38% YoY to S$25mn alongside a slowdown in capital market activities. Nonetheless, card fees improved 24% YoY to S$223mn as borders start to reopen and spending increased, while loan-related fees increased 15% to S$122mn.

- CASA ratio declined YoY. The Current Account Savings Accounts (CASA) ratio fell 8.9% YoY to 60.3% mainly due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 9% YoY to S$533bn. Management said that the drop in CASA was expected and that the increase in FDs was higher than the drop in CASA, hence a net increase in deposits.

• 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. 2Q22 DPS up 9% YoY at 36 cents.
• NIM increased 13bps YoY to 1.58% and loan growth of 7% YoY lifted NII. NIM grew 12bps QoQ. Fee income fell 12% YoY and other non-interest income dropped 10% YoY due to weaker market sentiment.
• Maintain BUY 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% YoY. NII grew 17% YoY to S$2.5bn due to NIM increase of 13bps YoY to 1.53% and continued loan growth of 7% YoY. 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 quality stable; 2Q22 allowances at S$46mn. 2Q22 total allowances were lower YoY and QoQ due to lower SPs of S$69mn for the quarter (S$167mn in 1Q22). Further, credit costs improved by 6bps YoY to 8bps. The GP write-back of S$23mn for 2Q22 was from credit upgrades and transfers to NPA. GP reserves remained prudent at S$3.74bn, with NPA reserves at 113% and unsecured NPA reserves at 199%. The NPL ratio was maintained at 1.3% as new NPA formation remained low.

+ Loan growth up 7%; deposits up 9% YoY in 2Q22. Loans grew 7% YoY and 1% QoQ to S$425bn. This was mainly driven by trade and corporate non-trade loans. Housing and WM 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% YoY and 1% QoQ to S$528bn, and current and savings accounts (CASA) accounted for 72% of customer deposits.

The Negative

- Fee income fell 12% YoY. The fee income decline YoY was mainly due to weaker market sentiment affecting wealth management and investment banking. WM fees fell 21% YoY to S$337mn as market conditions further weakened during the quarter. Investment banking fees fell by 54% YoY to S$30mn alongside a slowdown in capital market activities. Nonetheless, card fees improved 23% YoY to S$203mn 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.

Outlook

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% QoQ to 14.2% and is at the upper end of DBS’ target operating range. 2Q22 DPS is raised 9% YoY to 36 cents.

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 $18mn-20mn (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%.

• 1Q22 earnings of S$1.80bn in line with our estimates. 1Q22 PATMI is 24% of our FY22e forecast. 1Q22 DPS stable QoQ at 36 cents.
• NIM fell 3bps YoY to 1.46% but loan growth of 8% YoY cushioned NII. NIM grew 3bps QoQ. Fee income grew 9% QoQ but fell 7% YoY due to weaker market sentiment.
• Maintain ACCUMULATE with unchanged target price of S$41.60. Our FY22e estimates remain unchanged. For FY22e, management guided benign provisions, continued growth in loans and stable NIMs. We believe there is upside to NIM guidance. A 50bps move in interest can raise earnings by 13%.

Results at a glance

Source: Company, PSR

The Positives

+ Asset quality stable, 1Q22 allowances at S$55mn. 1Q22 total allowances were higher YoY and QoQ due to higher SPs of S$167mn for the quarter. Nonetheless, credit costs were maintained at 15bps which is in  line with recent quarters when significant repayments were excluded. The GP write-back of S$112mn for 1Q22 was from  credit upgrades and transfers to NPA. GP reserves remained prudent at S$3.75bn, which were S$200mn above the MAS requirement and S$1bn above Tier-2 eligibility. NPL ratio was maintained at 1.3%.

+ Loan growth up 8%, deposits up 9% YoY in 1Q22. Loans grew 8% YoY and 2% QoQ to S$416bn. This was mainly due to non-trade corporate loans growth led by drawdowns in Singapore and Hong Kong across a range of industries. Housing and WM loan growth was sustained at the previous quarter’s levels. Management has maintained its FY22e loan growth guidance of mid to single-digit or better. Deposits grew 9% YoY and 4% QoQ to S$520bn, and current and savings accounts (CASA) accounted for 75% of customer deposits.

The Negative

- NII and NIMs remain relatively unchanged. NIM grew 3bps QoQ but declined 3bps YoY to 1.46% as a result of lower market interest rates as customer deposits grew 4% QoQ to S$520bn. NII grew 2% QoQ and 4% YoY to S$2.2bn as higher loan and deposit volumes were moderated by stagnant NIMs. Management has increased its guidance for FY22e NIM to 158 - 160bps.

- Fee income fell 7% YoY. Fee income decline YoY was mainly due to weaker market sentiment affecting wealth management and investment banking. WM fees fell 21% YoY to S$408mn with declines in investment product sales mitigated by higher bancassurance income. Investment banking fees fell by 12% YoY to S$43mn as fixed income activities fell. Nonetheless, fee income grew 9% QoQ mainly due to higher fees from loan-related activities, transaction banking and wealth management as it recovered from a seasonally lower 4Q21.

Outlook

Business momentum 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. While the CET-1 ratio fell by 0.4% QoQ due to MAS’ operational risk penalty, the CET-1 ratio of 14% is still at the upper end of DBS’ target operating range. 1Q22 DPS is maintained QoQ at 36 cents, above pre-pandemic 33 cents.

Upside from higher rates: DBS said that a 1 bps rise in interest rates could raise NII by $18mn-20mn (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%.

Investment Action

Maintain ACCUMULATE with unchanged target price of S$41.60.

We maintain our ACCUMULATE recommendation with an unchanged GGM target price of S$41.60. We are keeping our FY22e forecast unchanged. Our target price remains based on GGM (1.79x FY22e P/BV, 13.0% ROE estimate) valuation.

• FY21 earnings of S$6.8bn met our estimates as higher fee income and strong loans growth offset lower NIMs. 4Q21 DPS rose 9% to 36 cents.
• NIM fell 6bps YoY to 1.43% but loan growth of 9% YoY cushioned NII. NIM remained flat QoQ. SPs down 1% to 67mn in 4Q21.
• Maintain ACCUMULATE with a higher GGM TP of S$41.60, up from S$35.90. We raise FY22e earnings by 2% as we raise NII estimates for FY22e. We now assume 1.79x FY22e P/BV in our GGM valuation, up from 1.56x, as we raise our ROE estimates to 13.0%. For FY22e, management guided benign provisions, continued growth in loans and stable NIMs. We believe there is upside to NIM guidance. A 50bps move in interest can raise our earnings by 13%.

The Positives

+ Fee income grew 9% YoY. Fee income growth YoY was broad-based and was led by wealth management and transaction services. However, fee income fell 8% QoQ despite higher card and investment activities which were offset by seasonally lower WM fee income. Full-year fee income grew by 15% YoY to a record S$3.52bn as economic and market conditions improved.

+ Asset quality stable, FY21 total allowances at S$52mn. 4Q21 total allowances were significantly lower YoY but higher QoQ due to a lower write-back in GPs. SPs fell 82% YoY to S$67mn (6bps) but remained relatively unchanged QoQ. Full-year allowances fell 98% YoY to S$52mn due to repayments of weaker exposure, credit upgrades and transfers to non-performing assets resulting in general allowance write-backs during the year. Full-year credit cost of 12bps is below pre-pandemic levels. Management has guided similar allowances for FY22e.

+ Loan growth up 9% YoY in 4Q21. Loan growth was led by non-trade corporate loans with growth led by drawdowns in Singapore and Hong Kong. Housing and WM loan growth was sustained at the previous quarter’s levels. Full-year loan growth of 9% was the highest in seven years as growth was recorded across the region and a range of industries. Management has guided FY22e loan growth of mid to single-digit or better.

The Negative

- NII and NIMs remain relatively unchanged. NIM remained flat QoQ but declined 6bps YoY to 1.43% as a result of lower market interest rates as customer deposits grew 3% QoQ to S$502bn. NII grew 2% QoQ to S$2.1bn as higher loan and deposit volumes were moderated by stagnant NIMs. Management guided similar FY22e NIMs of 145-150bps.

Outlook

Business momentum strong: Despite economic uncertainties from Singapore’s return to Phase 2 (Heightened Alert), loans and transaction pipelines are expected to be strong.

GP reserves sufficient: With its capital position and liquidity – CET-1 ratio of 14.4% in 4Q21 vs 13.9% in 4Q20 – well above regulatory requirements and high allowance reserves, we believe the bank has sufficient provisions to ride out current economic uncertainties. If we were to include the acquisition of Citigroup’ Taiwan consumer banking business and MAS’ operational risk penalty, the CET-1 ratio of 13.3% is still at the upper end of DBS’ target operating range. 4Q21 DPS is up 9% to 36 cents, above pre-pandemic levels.

Upside from higher rates: DBS mentioned that a 1 bps rise in interest rates could raise NII by $18mn-20mn (or NII sensitivity of 2% for every 10bps). Assuming two rate hikes of 50bps this year, our FY22e NII can climb S$2bn (or 21%) resulting in an increase in our FY22e PATMI by 26%.

Benign provisioning cycle. DBS guided credit cost of 12 bps. This is below the pre-pandemic FY18/19 credit cost of 19/20bps. The lower credit cost is due to lower SPs and an improving environment.

Investment Action

Maintain ACCUMULATE with a higher target price of S$41.60, up from S$35.90.

We raise FY22e earnings by 2% as we raise NII estimates for FY22e. We now assume 1.79x FY22e P/BV in our GGM valuation, up from 1.56x, as we raise our ROE estimates to 13.0%.

• 3Q21 earnings of S$1.7bn exceeded forecast due to reversal in general allowances. 9M21 PATMI is 83% of our FY21e forecast. 3Q21 DPS jumped 83% to 33 cents.
• Asset quality stable, resulting in further GP write-backs of S$138mn. Management lowered full-year allowances to under S$100mn (9M21 allowance at S$19mn).
• Maintain ACCUMULATE with a higher GGM TP of S$35.90, from S$32.00. We raise FY21e earnings by 3.9% as we lower allowances estimates for FY21e. We now assume 1.56x FY21e P/BV in our GGM valuation, up from 1.39x, as we raise our ROE estimates to 11.6%. DBS pays a 4.5% FY21e with earnings upside from higher interest rates.

The Positives

+ Fee income grew 11% YoY. All fees rose by double digits from a year ago. WM fees rose 16% YoY with higher activity across a range of investment products. Transaction fees grew 18% YoY to a new high of S$239mn from increases in cash management and trade finance. Card fees rose 13% YoY as consumer spending continued to recover towards pre-pandemic levels.

+ Asset quality stable, resulting in further GP write-backs of S$138mn. Repayment by weaker exposures and credit upgrades allowed DBS to write back GPs during the quarter. SPs fell 59% YoY to S$68mn due to a write-back for a non-performing loan. It lowered full-year allowances to under S$100mn (9M21 allowance at S$19mn) with credit cost likely to be under 20bps. We believe full-year allowances will come under this guidance because of the Group’s asset quality. In light of its recent GP write-back, we cut total provisions for FY21e to S$19mn from S$309mn.

+ Loan growth up +9% YoY in 3Q21. Loan growth was led by non-trade corporate loans with growth led by drawdowns in Singapore and Greater China. Housing and WM loan growth was sustained at the previous quarter’s levels. However, these increases were offset by a S$2bn decline in trade loans from higher repayments. Management’s guidance for FY21e loan growth remains unchanged at high-single digit.

The Negative

- NIMs declined 2bps QoQ to 143bps; full-year guidance now at the lower end of range. NIM decline was a result of lower market interest rates as deposits grew 1% QoQ to S$489bn. NII grew 1% QoQ to S$2.1bn as higher loan and deposit volumes were moderated by lower NIMs. Management now expects FY21 NIMs to fall at the lower end of its guided range of 145-150bps.

Outlook

Business momentum strong:  Despite economic uncertainties from Singapore’s return to Phase 2 (Heightened Alert),   loans and transaction pipelines are expected to be strong. We lower allowance estimates for FY21e. Consequently, our earnings for FY21e rise by 3.9%.

Loans under moratorium: Total loans under moratorium remains low at 0.5% of total loans, with no exposure in the rest of ASEAN, i.e., Malaysia, Indonesia. SME and mortgage loans under moratorium in Singapore are down to around S$100mn with no delinquencies. 80% of ESG loans in Singapore are paying both interest and principal with no pickup in delinquencies. The Group also has no exposure to real estate loans in Mainland China.

GP reserves sufficient: With its capital position and liquidity – CET-1 ratio of 14.5% in 9M21 vs. 13.9% in 9M20 – well above regulatory requirements and high allowance reserves, we believe the bank has sufficient provisions to ride out current economic uncertainties. 3Q21 DPS is 33 cents, back to pre-pandemic levels. We do not rule out special dividends.

Upside from higher rates: DBS mentioned that a 10 bps rise in interest rates could raise PBT by $18m to $20mn (or PBT sensitivity of 0.3% for every 10bps). Assuming two rate hikes of 50bps next year, our FY22e PBT can climb S$1bn (or 14%).

Investment Action

Maintain ACCUMULATE with a higher target price of S$35.90, up from S$32.00

We raise FY21e earnings by 3.9% as we lower allowances estimates for FY21e. We now assume 1.56x FY21e P/BV in our GGM valuation, up from 1.39x, as we raise our ROE estimates to 11.6%.

• FY20 earnings in line as lower credit costs compensated for weaker-than-expected income.
• NIM fell 27bps to 1.62% YoY but loan growth of 4% YoY cushioned NII. NIM further contracted 4bps to 1.49% QoQ.
• Fees and commissions grew 1% YoY, recovering to pre-COVID levels.
• Allowances matched 3Q20 levels despite the consolidation of troubled Lakshmi Vilas Bank (LVB).
• Upgrade to ACCUMULATE from NEUTRAL with higher GGM TP of S$29.50, from S$22.60. We increase earnings by 6% for lower allowances following a better credit outlook. We now assume 1.31x FY21e P/BV in our GGM valuation, up from 1.26x.

The Positives

+ Fees and commissions back to pre-COVID levels

Fees and commissions grew 1% YoY in 4Q20 from S$741mn to S$747mn. WM fees grew 21% YoY to offset weakness in investment-banking and credit-card fees.

We forecast 12% growth in fees and commissions for FY21e as economic conditions improve. Investment-banking and credit-card fees are expected to recover to pre-COVID levels while WM fees should continue to power ahead.

+ FY20 allowances at lower end of 2-year guidance

4Q20 allowances of S$577mn ticked up 4% QoQ. They included S$183mn of GP from its consolidation of LVB.

FY20 allowances totalled above S$3bn. But this was at the lower end of the S$3-5bn guided by the bank for FY20-21. GP reserves hit S$4.31bn, in excess of MAS’ requirement by 42%.

We think that FY20 provisions will be sufficient for asset-quality deterioration in FY21 and expect credit costs to normalise to pre-COVID levels along with the economic recovery.

The Negative

- NIM down by 4bps QoQ to 1.49%

NIM further tightened in 4Q20, contributing to a 2% decline NII QoQ. FY20 NII fell 6% on a 27bp YoY drop in NIM. The impact on NII was muted by 4% loan growth YoY in FY20.

The bank guided for NIM of 1.45-1.50% for FY21e as interest rates stabilise. Nevertheless, a cheap funding environment should allow it to continue with its low-yield lending, including interbank loans, to boost NII.

Outlook

Clarity on loan moratorium

Loans under moratorium fell significantly to S$4.5bn, to roughly 1.2% of DBS’ loan book, as Singapore exited the first phase of its loan moratorium. Low delinquencies from the loans that exited moratorium support a lower credit-cost forecast of S$1bn for FY21e. This implies FY20-21 allowances of S$4bn, midway of the S$3-5bn range guided by the bank.

Pipeline for growth

DBS’ LVB consolidation will expand the bank’s footprint in India. Earlier operating concerns have waned after DBS took decisive action to provide for NPAs.

The bank’s securities JV in China and digital-exchange partnership with SGX are also expected to augment its business from FY21. 

Investment Action

Upgrade to ACCUMULATE with higher target price of S$29.50, up from S$22.60

We raise FY21e earnings by 6% as we lower allowances by S$1bn. We also lower COE in our GGM valuation from 9.4% to 8.2% and assume a 10.1% FY21e ROE. This reflects lower risks as equity markets improve.

• 3Q20 earnings of S$1,297mn brought 9M profit to S$3.7bn. At 79% of our FY21e estimate, results were in line with consensus as well, with allowances lower than expected.
• NII fell 12% YoY as NIM was down 37bps to 1.53%. Weakness could sustain into 4Q20.
• Fees and commissions were up 17% QoQ on recovery in wealth-management and credit-card fees.
• Maintained 18-cent quarterly dividend. Scrip dividend will also be available for 3Q20.
• Maintain NEUTRAL with higher GGM TP of S$22.60, from S$21.00. No change to earnings estimates but we peg our valuation at a higher 1.26x FY21e P/BV on lower allowances from a better credit outlook. For sector exposure, prefer UOB (SGX: U11, Accumulate, TP: S$21.10).

The Positives

+ Recovery in non-interest income

Fees and commissions were down 2% YoY from S$814mn to S$798mn but up 17% QoQ as wealth-management and credit-card fees recovered. Wealth-management fees grew 25% QoQ and 6% YoY, a strong recovery. Credit-card fees of S$160mn were up 22% QoQ, though still down 20% YoY as consumer spending on big tickets such as travel remained subdued.

Trading income grew 11% YoY to S$608mn as the bank continued to realise profits on investment securities. QoQ, it was down 18% from a high base. Altogether, non-interest income offset the weakness in NII.

+ Allowances tapering off

Allowances of S$554mn were 35% lower than the S$849mn recorded in 2Q20. They are expected to stabilise as the bank comes off front-loaded provisions of S$1.94bn in 1H20. This is expected to lift pressure on profits in subsequent quarters.

The Negatives

- NII fell 12% YoY as NIM was compressed 37bps to 1.53%

NIM further tightened 9bps QoQ from 1.62% to 1.53%, chipping NII by 6%. The low NIM was a result of low interest rates, loan contraction of 1% and an increase in deposits of 1%.

Outlook

Asia embarks on swift recovery

The bank expects a strong economic rebound in Asia in 2021 to support mid-single-digit loan growth in FY21. However, as Singapore loan growth remains tepid, we are hesitant to revise our loan-growth assumptions of 2-3%. A strong fee-income recovery to pre-COVID level is expected to support its income recovery in 2021.

Investment Action

Maintain NEUTRAL with higher target price of S$22.60, up from S$21.00

We hold our FY21e earnings estimate and peg our GGM valuation to a higher FY21e ROE of 11.4%. The higher ROE comes from improved income and lower allowances that are expected to increase profits by 16% in FY21e.