Analysts are mixed after DBS Group Holdings announced the appointment of Tan Su Shan as its next group CEO. Tan will step into the role effectively from March 2025.
The bank reported a net profit of $2.8 billion for the 2QFY2024 ended June 30 and net profit of $5.76 billion for the 1HFY2024 on the same day.
‘Buy’ calls
Maybank Securities, OCBC Investment Research (OIR) and RHB Bank Singapore have kept their “buy” calls while PhillipCapital upgraded its call to “buy” due to DBS’s recent share price performance.
PhillipCapital analyst Glenn Thum has kept his target price unchanged at $38.50 as his FY2024 estimates remain unchanged. DBS’s adjusted patmi for the 2QFY2024 stood slightly above his estimates due to the higher net interest income (NII), fee income and other non-interest income. The bank’s adjusted patmi for the 1HFY2024 stood at 54% of Thum’s full-year forecast.
In his Aug 8 report, Thum likes DBS’s higher NII from loan and deposit growth, higher wealth management fees, and improved credit cost and specific provisions (SPs). Meanwhile, he flagged DBS’s higher expenses, lower current account savings accont (casa) ratio as negatives.
“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,” Thum writes, noting that DBS’s common equity tier 1 (CET-1) ratio rose by 10 basis points (bps) q-o-q and 70 bps y-o-y to 14.8%. The CET-1 ratio remains at the upper end of DBS’s target operating range of 12.5% to 13.5%.
“Management has mentioned that there is a need to return capital and hinted at a possibility for a further increase in dividends but has not confirmed how/when it would be done,” he adds.
Looking ahead, the analyst says he expects to see stable growth in NII from the continued fixed asset repricing and deployment of deposits into longer tenure income accretive interest earning assets. At the same time, he expects DBS’s loan growth to recover from rate cuts in 2HFY2024. “[The bank’s] double digit fee income growth will give a further boost to earnings,” he writes.
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The Singapore research team at RHB Bank Singapore increased its target price to $41.40 from $41.20 as DBS’s 2QFY2024 results beat estimates. The bank’s net profit for the 1HFY2024 stood at 55% of the team’s full-year forecasts. The higher target price also comes about as management increased its patmi growth outlook for FY2024.
On Tan’s appointment, the RHB team does not think the change in leadership will detail its dividend and capital return thesis.
“According to DBS, the capital plan agenda is driven by the board, which remains intact,” the team writes in its Aug 8 report.
To this end, it has raised its FY2024 patmi estimates by 3% on the back of the bank’s better-than-expected results. It has kept its FY2025 to FY2026 earnings estimates unchanged.
OIR analyst Carmen Lee has kept her fair value estimate of $39.83 as DBS posted a “credible” 2QFY2024. In her Aug 8 report, Lee noted the above-consensus 2QFY2024 earnings, higher quarterly dividend, unchanged net interest margin (NIM) of 2.14% and “healthy” liquidity and capital ratios.
Like her peers at RHB, Lee does not expect Tan’s appointment to have a significant impact on the bank. Noting that the move was “not completely unexpected”, Lee highlighted Tan’s experience with the group and her familiarity with two of DBS’s key pillars.
Maybank’s Thilan Wickramasinghe has lowered his target price to $38.76 from $38.87 as DBS’s 1HFY2024 earnings stood ahead of his expectations. In his Aug 7 report, Wickramasinghe noted the bank’s improving fees and good cost management. NIMs are also holding better than its peers, he adds.
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However, the analyst warns investors against headwinds amid the impending rate cuts from the US Federal Reserve (US Fed).
“The new CEO-designate signals continuity in our view. A strong balance sheet, high CET-1 and a focus on returning capital back to shareholders keeps dividend visibility high, even as rates come down,” he says.
The analyst has also lowered his earnings per share (EPS) estimates for FY2025 to FY2026 by 1%.
‘Hold’ call
CGS International analysts Andrea Choong and Lim Siew Khee kept their “hold” call even though DBS’s 2QFY2024 net profit stood in line with their expectations. The bank’s core net profit for the 1HFY2024 formed 54% of their full-year estimates.
To Choong and Lim, the bank’s key operating metrics were in line and its asset quality remained sound.
“We expect positive share price momentum given the beat on consensus’ expectations but retain our ‘hold’ call as we think that earnings growth over FY2025 – FY2026 could be limited given the impending US Fed fund rate cuts,” they write in an Aug 7 flash note.
In another report also dated Aug 7, Choong and Lim lowered their target price to $37.30 from $39.30 previously due to the likelihood of steeper rate cuts from the US Fed in FY2024 to FY2025. They have also increased their cost of equity (COE) estimate to 11.1% from 10.8%.
Following DBS’s briefing, Choong and Lim noted that management was “fairly confident” in its trajectory for FY2024.
“As with [its] peers, income generation will continue to be a priority over solely maintaining NIMs,” they say.
“DBS has been taking a proactive stance in positioning itself for impending US Fed fund rate cuts by placing excess liquidity into longer-duration (3.5 years), fixed-rate, high-quality assets to sustain NII into FY2025 – FY2026,” they add. “Notably, its 2QFY2024 treasury markets NIM was bogged down by higher funding costs to fund these low-risk but accretive assets.”
In the 1HFY2024, DBS’s fixed rate placements totalled $40 billion, compared to the $27 billion that was due. The portfolio came up to $190 billion at end-2QFY2024, the analysts note.
“Given its reduced NII sensitivity of $4 million per bp of US Fed fund rate cut, an effective 150bp of Fed rate cuts (the Fed fund futures is currently projecting six cuts having a 50% or more probability) could result in a $600 million reduction in NII in FY2025,” they add.
DBS’s commercial real estate (CRE) portfolio in Hong Kong remained sound, with credit costs likely to remain low, the analysts note.
As a result, they have raised their EPS estimates for FY2024 by 3% due to stronger NII on the back of the higher-for-longer interest rates and lower credit costs due to the bank’s benign asset quality.
However, the analysts have lowered their EPS estimates for FY2025 to FY2026 by 2% as they expect weaker NIMs from the steeper rate cuts.
‘Sell’ call
Citi Research analyst Tan Yong Hong has kept his “sell” call on DBS with an unchanged target price of $31.90 after seeing “solid operational trends” for the bank’s 2QFY2024 results.
Tan downgraded all three Singapore banks – DBS, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB) to “sell” on Aug 5 after first signs of US contraction emerged. Citi economists expect to see 225 bps of rate cuts by the US Fed in 10 months.
In his Aug 7 report, Tan notes that DBS’s NIM sensitivity is below its peers but the market is likely waiting for the 1QFY2025 to re-assess any realised NIM sensitivity.
Looking back at CEO Piyush Gupta’s 15-year tenure, Tan notes that DBS’s price-to-book expanded from a 23% discount to the bank’s peers’ average as at Sept 1, 2009, to a 36% premium on Aug 5. The price-book peaked at 50% on May 8.
DBS’s 12-month return on equity (ROE) also expanded from 8.4%, which was 2.7% behind its peers then, to 16.1%, now 3.4% ahead of its peers.
“Simplistically applying this ROE premium to theoretical P/B implies 5% downside to share price, but DBS has higher dividend yield prospects,” says the analyst.
“[The] market’s likely focus is capital management and geographical diversification (Singapore & greater China drives [over] 90% of profits),” he adds.
