Analysts from UOB Kay Hian (UOBKH), Maybank Securities and RHB Bank Singapore have maintained their “buy” calls on DBS Group Holdings (DBS) and raised their target prices for Singapore’s most valuable public company, following its record 3QFY2024 earnings announcement on Nov 7.
While Morningstar remains optimistic with a rating of “four stars”, OIR and CGS International have maintained respective their “hold” calls.
DBS announced a record net profit of $3.03 billion for the quarter to Sept 30, up 15% y-o-y, led by a 55% y-o-y surge in wealth management fees and markets trading income, which doubled y-o-y to $332 million in 3QFY2024.
For the quarter, DBS declared a dividend of 54 cents per share, bringing payout for 9M2024 to $1.62, equivalent to a payout ratio of 53%. At this level, the dividend implies an annualised yield of 5.5%, as at the closing price of $39.15 on Nov 6.
“At the dividend yield of 5.5%, it is trading at 1 standard deviation (sd) above the 10-year historical average yield of 4.4%,” OIR adds.
In addition to dividends, DBS plans to return capital to shareholders via a new $3 billion share buyback scheme.
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UOBKH and Maybank have upgraded their target price to $46.95 and $46.91, up from $42.70 and $44.06, respectively. RHB has increased its target price from $41.40 to $44.70, while OIR increased its target price from $39.83 to $43.60.
CGSI has also upgraded its target price to $43, from $37.30 previously, factoring in fewer US Fed fund rate cuts, stronger wealth management fees and treasury income from market volatility over FY2024 to FY2026 forecasts and its risk-free rate cut to around 3%.
On the other hand, Morningstar has maintained its fair value estimate at $44, despite the positive buyback news and strong earnings quarter.
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3QFY2024 key results
In 3QYF024, the bank’s assets under management (AUM) grew 13.6% y-o-y to $401 billion, while card fees increased 12% y-o-y. Transaction fees were stable at $227 million.
Overall, fees and commissions grew 32% y-o-y.
UOBKH analyst Jonathan Koh attributed this “broad-based growth” to buoyant sentiment and brisk sales of investment and bancassurance products.
While DBS management expects high-single digit fee growth in 2025 estimates, Maybank is of the opinion that this could “positively surprise”.
According to analysts, non-interest income (NoII) was better than expected, supported by 3QFY2024 market trading income on DBS’ own book increasing 53% y-o-y in foreign exchange (FX), rate and equity derivative volatility.
While it remains unpredictable, given volatility heading into 4Q2024, Maybank expects an elevated contribution and raises its 2024 to 2026 estimated NoII by 3% to 8%.
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Net interest income (NII) was also better than expected, rising by 2.6% y-o-y.
NIM eased 3 basis points (bps) y-o-y and q-o-q to 2.11% in 3QFY2024 while loans grew 2% y-o-y on a constant-currency basis driven by trade loans and non-corporate loans.
Maybank notes that “Net interest margin (NIM) fell 3 basis points (bps) y-o-y and q-o-q partly from deploying liquidity to products with accounting asymmetry where the costs are captured in NII, but income is expressed in NoII.”
Maybank expects NIM declines to be measured moving forward due to hedging and potential delays in Fed rate cuts under a Trump administration.
“Loan growth has disappointed given large repayments. DBS is seeing a good pipeline of new credit demand especially in renewables, technology, media and telecommunications (TMT), property,” Maybank notes, adding that “management is expecting low single digit recovery in 2025 estimates.”
Operating expenses (opex) increased 10% y-o-y to $2.25 billion in 3QFY2024 with Citi Taiwan account for 3 percentage points (ppt) of the increase.
“Cost-to-income ratio remains healthy at 39.1%,” UOBKH’s Koh notes.
RHB adds that while NII, trading income and opex were trading “favourably against” their forecasts, RHB expects the “gap to narrow in 4Q2024 on a combination of rate cuts and seasonality”.
Asset quality
Maybank expects DBS’s asset quality to be benign with non-property loans (NPL) falling to 1%.
NPLs declined 8% q-o-q in 3Q2024 given the “sizeable repayment and recoveries” of $491 million from legacy oil and gas exposures, recent money laundering cases and monetising properties held as collaterals for exposures in Hong Kong and China, UOBKH’s Koh notes.
CGSI analyst Andrea Choong and Lim Siew Khee note that no sectoral risks were highlighted and while there is potential for writebacks of management delays of about $2.3 billion in 3Q2024, management still recognised a need for prudence.
Choong and Lim expect this to be done gradually.
Share buyback programme
Morningstar analyst Michael Makdad notes that the $3 billion share buyback sets a new precedent for Singapore banks, which typically favour dividends over large share buybacks.
RHB notes that shares bought back will be cancelled, which will help lift earnings per share (EPS) and ROE.
“While this is expected to reduce the fully phased-in CET-1 ratio by 80bps, DBS said it would still be sitting on excess capital north of $3 billion that can be utilised,” RHB adds.
DBS’s common equity tier 1 (CET1) ratio rose to 17.2% on a traditional basis, driven by lower operational risk assets and updated loss-given-default assumptions, Morningstar’s Makdad notes.
Even with final Basel III rules fully phased in, CET1 ratio would be 15.2%, exceeding DBS’s target.
Maybank notes that upon completion of the share buyback programme, CET1 should fall by 0.8 percentage points (ppt) and earnings per share (EPS) could grow 3%, with the programme taking two to three years.
CGSI’s Choong and Liew notes that DBS estimates around $6 billion in transitory excess capital due to Basel III reforms, with around $2 billion to be used to redeem additional Tier-1 Capital securities, and the rest being used for shareholder returns.
Impact of US presidential elections
With Donald Trump as the newly elected President, OIR notes that the outlook for rates remains uncertain and market watchers will look to the Nov 8 Federal Open Market Committee (FOMC) meeting for indications.
“Based on the proposed tariffs during his campaigns, it is likely that this will result in continued high inflation if high tariffs are imposed on all imports and immigration policies are tightened which could potentially result in labour shortages,” OIR adds.
OIR notes that following the US presidential outcome, 10-year treasury rates increased by 16bps overnight to 4.428%, with many US banks rallying strongly.
OIR states that “Singapore banks have also reacted positively to both DBS’s strong 3QFY2024 results and the US Presidential election result.”
While OIR recognises that US external trade policies remain uncertain, OIR believes that the Singapore market is likely to remain fairly defensive and will be favoured for the high dividend yield.
Looking ahead
CGSI’s Choong and Liew note that DBS’s reduced NII sensitivity of $4 million per bps of Fed fund rate cut, as well as lower funding costs benefitting its market trading segment, underpins its outlook of FY2025 forecasted NII holding steady at FY2024 forecasted levels.
An increase in commercial book non-II from wealth management fees and treasury customer sales, alongside higher but still contained, credit costs of around 17-20bp, underlies DBS’s expectations of FY2025 forecasted profit before tax (PBT) coming in at around FY2024 forecasted levels, CGSI’s Choong and Liew note.
According to DBS’s management, other earnings upsides include interest rates not declining as much as forecasts, increased reversals of current account and savings account (CASA) outflows or more fixed asset repricing at better yields in FY2025 forecasts.
Morningstar’s Makdad has raised his fee income growth forecasts again, although the benefit to fair value is offset by a revised effective tax rate of 15% as Singapore adopts the global minimum tax.
Besides the share buyback programme, Maybank is of the opinion that DBS is likely to raise progressive dividends higher. As such, Maybank upgrades its 2024 to 2026 estimated DPS forecasts by 1% to 11%.
UOBKH’s Koh raises his earnings forecast by 1% for 2025 due to the higher income, higher trading income and lower credit costs, which would be partly offset by higher taxes.
RHB raises their FY2024, FY2025 and FY2026 forecasted profit after tax and minority interest by 3%, 1% and 3%, respectively.
As at 4.19pm, units in DBS are trading 62 cents higher or 1.49% up at $42.32.
