• 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.