• 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%.