• 4Q23 adjusted PATMI of S$2.39bn was slightly above our estimates due to higher NII, fee income, and other non-interest income offset by higher allowances. FY23 adjusted PATMI is 102% of our FY23e forecast. 4Q23 DPS is raised 29% YoY to 54 cents with an additional 1-for-10 bonus issue, dividend payout ratio was higher at 48.5% in FY23 (FY22: 47.7% excluding special dividends).
• NII rose 5% YoY on NIM expansion of 8bps despite loan growth remaining flat. Fee income rose 31% YoY, while other non-interest income grew 9% YoY. DBS has maintained its FY24e guidance of double-digit fee income growth (from wealth management and credit card fees), stable NII as higher NIMs from higher-for-longer rates will be offset by lower loan growth and total allowances to normalise to 17-20bps of loans. FY24e PATMI to be maintained at around the current levels in FY23.
• Maintain BUY with a lower target price of S$38.90 (prev. S$41.60). We lower FY24e earnings by 1% as we lower NII estimates for FY24e due to lower NIMs, and increase allowances and OPEX estimates, offset by higher fees, and other non-interest income. We assume 2.14x FY24e P/BV and ROE estimate of 16.0% in our GGM valuation. Stable NII from a recovery in loan growth and double-digit growth in fee income will sustain earnings momentum.

The Positives

+ NIM and NII continue to increase YoY. NII rose 5% YoY to S$3.4bn due to an 8bps NIM increase to 2.13% (3Q23: 2.19%) as interest rates continue to remain high, despite loan growth remaining flat YoY. Loan growth was stable as higher trade and consumer loans were offset by lower non-trade corporate loans. Nonetheless, the Citi Taiwan consolidation contributed S$10bn to loans.

+ Fee income recovers strongly. Fee income rose 31% YoY to S$867mn. WM fees increased 41% YoY driven by strong net new money inflows as customers shifted deposits into bancassurance and investments, while card fees grew 27% YoY from higher spending and the integration of Citi Taiwan. Loan-related fees rose 80% YoY, while investment banking fees were up 26% YoY. These increases were moderated by a 4% YoY decline in transaction fees as trade finance slowed.

+ Other non-interest income rose 9% YoY. Other non-interest income growth was mainly due to higher treasury customer sales and gains from investment securities. Notably, commercial book accounts for a majority of other non-interest income was at 55%, while treasury markets accounts for 45%.

The Negatives

- Allowances rose 438% YoY. 4Q23 total allowances were higher 438% YoY due to normalised GP of S$3mn (4Q22: writeback of S$116mn) and higher SP of S$139mn (4Q22: S$74mn). As a result, 4Q23 credit costs rose to 11bps, with FY23 credit costs at 11bps. The NPL ratio was flat at 1.1% (4Q22: 1.1%), while GP reserves grew 4% YoY to S$3.90bn. Notably, management mentioned S$2.2bn of management overlay, which could be released if SP comes in higher than expected.

- CASA ratio decline continues. The Current Account Savings Accounts (CASA) ratio fell 8% points YoY to 52.3%, mainly due to the high-interest rate environment and a continued move towards fixed deposits (FDs). Nonetheless, total customer deposits grew 2% YoY to S$535bn as the decline in CASA deposits was offset by growth in FDs and a contribution of S$12bn from the Citi Taiwan consolidation.

• 3Q23 adjusted PATMI of S$2.63bn was above our estimates due to higher NII, fee income and other non-interest income offset by higher allowances. 9M23 adjusted PATMI is 78% of our FY23e forecast. 3Q23 DPS is raised 14% YoY to 48 cents.
• NII rose 16% YoY on NIM expansion of 29bps despite loan growth dipping slightly. Fee income rose 9% YoY, while other non-interest income grew 21% YoY. DBS has maintained its FY23e guidance. It provided FY24e guidance of double-digit fee income growth (from wealth management and credit card fees), stable NII as higher NIMs from higher-for-longer rates will be offset by lower loan growth and total allowances to normalise to 17-20bps of loans. FY24e PATMI to be maintained at around the current levels in FY23.
• Maintain BUY with an unchanged target price of S$41.60. Our FY23e estimates remain unchanged. We assume 1.90x FY23e P/BV and ROE estimate of 16.6% in our GGM valuation. Continued NIM growth from higher-for-longer interest rates and a recovery in fee income will sustain earnings momentum.

The Positives

+ NIM and NII continue to increase YoY. NII rose 16% YoY to S$3.5bn due to a 29bps NIM increase to 2.19% (2Q23: 2.16%) as interest rates continue to remain high, despite loan growth dipping 2% YoY. Loan growth dipped due to a decline in customer and trade loans due to unattractive pricing while non-trade corporate loans were lower due to higher repayments. Nonetheless, the Citi Taiwan consolidation contributed S$10bn to loans.

+ Fee income continues to grow. Fee income rose 9% YoY to S$843mn. WM fees increased 22% YoY from higher bancassurance and investment product sales, while card fees grew 21% YoY from higher spending and the integration of Citi Taiwan. Loan-related fees rose 12% YoY, while transaction fees were flat YoY. These increases were moderated by a 16% YoY decline in investment banking fees due to slower capital market activities.

+ Other non-interest income rose 21% YoY. Other non-interest income rose 21% YoY mainly due to an increase in net trading income from higher trading gains and an increase in treasury customer sales to both wealth management and corporate customers. Notably, commercial book accounts for majority of other non-interest income was at 59%, while treasury markets accounts for 41%.

The Negatives

- Allowances rose 21% YoY. 3Q23 total allowances were higher 21% YoY due to higher SP of S$197mn (3Q22: S$25mn). Resultantly, 3Q23 credit costs rose to 18bps, with 9M23 credit costs at 11bps. The rise in SP was due to allowances being prudently taken for exposures linked to the recent money laundering case in Singapore. The NPL ratio rose slightly to 1.2% (3Q22: 1.1%), while GP reserves were stable YoY at S$3.91bn.

- CASA ratio decline continues. The Current Account Savings Accounts (CASA) ratio fell 12.5% points YoY to 47.8%, mainly due to the high interest rate environment and a continued move towards fixed deposits (FDs). Resultantly, total customer deposits were flat YoY at S$531bn as the decline in CASA deposits were partially offset by growth in FDs.

• 2Q23 adjusted PATMI of S$2.69bn was above our estimates due to higher net interest income (NII). 1H23 adjusted PATMI is 57% of our FY23e forecast. 2Q23 DPS is raised 33% YoY to 48 cents, bringing 1H23 dividend to 90 cents. We raise our FY23e DPS from S$1.68 to S$1.86.
• NII surged 40% YoY to S$3.43bn on NIM expansion of 58bps to 2.16% despite loan growth dipping 2% YoY. Fee income rose 7% YoY, the first YoY increase in six quarters, while other non-interest income grew 52% YoY. DBS increased its NIM guidance from 2.05-2.10% to around 2.15%, lowered loan growth guidance from 3-5% to low single-digit and maintained fee income guidance at high-single digit for FY23e.
• Maintain BUY with an unchanged target price of S$41.60. We raise FY23e earnings by 9% as we raise NII estimates for FY23e due to higher NIMs, offset by lower fee income, higher provisions, and higher expenses 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 40% YoY to S$3.43bn due to a NIM surge of 58bps YoY to 2.16% (3Q22: +32bps, 4Q22: +15bps, 1Q23: +7bps, 2Q23: +4bps) despite loan growth dipping 2% YoY. Increases in non-trade corporate loans were offset by lower trade loans. Housing loans were stable, while wealth management loans declined modestly. Management spoke of an upside bias to NIM from its current levels and indicated that NIM will likely peak in 2H23.

+ Fee income rose 7% YoY, first in 6 quarters. Fee income increased 7% YoY, the first YoY increase in six quarters. WM fees increased 12% YoY to S$377mn from higher bancassurance and investment product sales. Card fees grew 17% YoY to S$237mn from higher spending including for travel while loan-related fees rose 17% YoY to S$133mn. These increases were moderated by a 5% YoY decline in transaction service fees led by trade finance.

+ Other non-interest income rose 52% YoY. Other non-interest income rose 52% YoY mainly due to an increase in net trading income from higher trading gains and an increase in treasury customer sales to both wealth management and corporate customers. Additionally, gains from investment securities more than doubled due to improved market opportunities.

The Negatives

- Allowances rose 57% YoY. 2Q23 total allowances were higher 57% YoY due to an increase in SP to S$114mn (2Q22: S$69mn) offset by higher GP write-back of S$42mn for the quarter (2Q22: write-back of S$23mn). Resultantly, 2Q23 credit costs rose by 2bps YoY to 10bps. Nonetheless, the NPL ratio declined to 1.1% (2Q22: 1.3%) as new NPA formation fell by 39% YoY. GP reserves rose slightly to S$3.80bn, with NPA reserves at 127% and unsecured NPA reserves at 224%.

- CASA ratio decline continues. The Current Account Savings Accounts (CASA) ratio fell 14.9% points YoY to 51.5%, mainly due to the high interest rate environment and a continued move towards fixed deposits (FDs). Resultantly, total customer deposits fell 2% YoY to S$520bn as the decline in CASA deposits were partially offset by growth in FDs.

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%.