Analysts from Citi Research and RHB Bank Singapore have upgraded their outlook on DBS Group Holdings after the bank met its $10 billion earnings target for the FY2023 ended Dec 31, 2023.
DBS, on Feb 7, reported a net profit of $10.3 billion for the full year, 26% higher y-o-y and crossing the $10 billion mark for the first time.
Total income grew by 22% y-o-y to $20 billion due to the higher net interest margin (NIM) of 2.15% for the full year.
The bank has also proposed a 1-for-10 bonus issue in lieu of a special dividend. The bonus shares will qualify for dividends starting from the 1QFY2024. In the bank’s results briefing, DBS CEO Piyush Gupta shares that the bank will still have “a lot of capital” left and that the bonus issue “gives certainty into the future” and “builds…confidence that dividends will still be there”.
He adds that the bank will continue to target the minimum of 22 cents that it talked about previously.
Despite the record profit, Piyush Gupta will see a 30% pay cut in his variable compensation due to the tech disruptions in 2023. The amount comes up to around $4.14 million. As CEO, Gupta’s cut is higher than the rest of the group management committee’s 21% cut of their variable compensation. When asked about the figure, Gupta shared that it was determined by the board and said that range was deemed “reasonable” by the management team.
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Citi upgrades to ‘buy’ with higher TP of $35.40
Following DBS’s results, Citi analyst Tan Yong Hong has upgraded his call to “buy” from “sell” with a new target price of $35.40 from $29.20 previously.
Tan’s upgrade is due to several reasons including the bank’s relative underperformance in the past six months due to its perceived sensitivity to rates.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
“Management’s clarity on [stable] net interest income (NII) in FY2024 should allay this concern, at least through 1HFY2024,” he says in his report dated Feb 7. The economists at Citi expect the first rate cuts from the US Federal Reserve (US Fed) to happen in June.
The bonus share issue should also raise the bank’s fair value to at least $33.30 should all things remain equal, he reasons. “DBS’s enhanced capital return raises expectations for Oversea-Chinese Banking Corporation (OCBC) to stretch payout ratio, which drove OCBC’s outperformance and United Overseas Bank U11 ’s (UOB) underperformance on Feb 8. If that disappoints, DBS’s outperformance could persist, especially with management’s commitment to [around] 10% distribution per share (DPS) growth.”
In addition, DBS’s particular confidence in the growth of its non-interest income could surprise earnings despite the market’s view for downbeat earnings this year, says Tan.
Furthermore, he sees that the bank could exercise cost discipline into FY2024 especially on softer topline growth and as its tech resiliency roadmap reaches a completion rate of 80% by March 2024.
“[The latter] raises [the] question if [the] Monetary of Authority’s (MAS) capital charge can be released by year-end 2024,” says Tan.
“Putting this together, we expect DBS to reverse [its] underperformance over [its] peers and our new target price [of] $35.40 implies the stock to re-establish [a] 1.4 times valuation premium over [its] peers,” he adds.
The new target price also implies 6.9% of DBS’s FY2024 yields. Tan’s earnings estimates has now been raised to 1% to 4% in FY2024 but expects payouts to reach by 80% in FY2026.
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RHB also upgrades to ‘buy’ with higher TP of $36.10
The Singapore research team from RHB Bank Singapore has also upgraded its call on DBS to “buy” with a higher target price of $36.10 from $34.70 previously as the bank’s 4QFY2023 results stood in line with expectations. The bank is also broadly retaining its FY2024 guidance, which the team likes.
“Apart from a slightly more optimistic macroeconomic outlook, DBS’s guidance for FY2024 was largely unchanged from that shared back during the 3QFY2023 results briefing,” the team notes in its report dated Feb 8.
“Notably, DBS also guided for a reduced rates sensitivity of $9 million - $10 million impact to NII per basis point (bps) change in rates – half of that previously guided,” it adds.
This is due to two factors: a shift in the deposit mix where the current account savings account (CASA) ratio now stands at 53% versus 76% in FY2021, which means that a greater proportion of deposits will now reprice lower when rates fall. The other factor is the adding on of fixed rate duration assets during the quarter (three-year duration assets with yields at 4% - 4.5%), says the team.
While the team has tweaked its profit after tax and minority interests (patmi) estimates for the FY2024 to FY2025 to $9.8 billion and $9.9 billion respectively, their upgrade comes amid management’s improved clarity on its commitment to shareholder returns. For instance, its focus on absolute dividends per share offers investors “bond-like coupons” with yields that are now “too good to ignore”.
“We think the payouts are sustainable in the near term. A reduced rates leverage and ample overlay buffers are added ‘bonuses’,” it adds.
Rest of analysts keep ‘buy’ and ‘hold’ calls but most lower TPs
CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have kept their “hold” call as they see “limited scope” in its earnings revisions. This is given the muted growth environment, the analysts explain in their Feb 7 report. The analysts have lowered their target price to $34.40 from $35.30 on the enlarged share base from the bonus issue.
In FY2024, Choong and Lim see that the bank’s NII may remain steady despite the Fed rate cuts, which the bank expects to take place in the 2H2024.
“DBS expects the NII offset come from lower funding cost (as time deposits roll off), slower CASA outflow ([around] $20 billion outflow in FY2024 versus [around] $40 billion in FY2023), stronger contributions from Citi Taiwan, and lesser drag from its treasury markets book,” write Choong and Lim. “At the same time, DBS expects [some] $40 billion - $45 billion of assets to reprice in FY2024. DBS is expecting FY2024 NIMs to come in just below FY2023’s exit-NIM of 2.13%.”
That said, the bank’s NIM compression of 6 bps q-o-q in the 4QFY2023 was a “negative surprise”, especially when the analysts expected a narrower compression of 2 bps.
“While 4 bps (of the 6 bps decline) was due to the full-period impact of continued CASA outflow into fixed deposits in 4QFY2023, DBS had also taken a deliberate move to lock in lower-yielding fixed-rate asset positions to defend against lower interest rates to come,” note Choong and Lim.
“DBS kept the rest of its FY2024 guidance relatively unchanged and was optimistic on operating conditions improving into the year. From January’s data, fee momentum was strong, though loan growth stayed weak due to continued repayments. Overall asset quality remained resilient; DBS maintained its 17 bps – 20 bps credit cost guidance for FY2024,” they add.
Maybank Securities analyst Thilan Wickramasinghe has kept his “buy” call as DBS’s earnings were marginally ahead of his estimates. DBS’s 4QFY2023 dividends stood above expectations with quarterly payments increasing by 6 cents, implying a 13% y-o-y increase in its FY2024 dividend.
On the 1-for-10 bonus issue, FY2024’s dividends should be an estimated 24% higher, which is a “welcome” move.
However, he sees the bank’s earnings growth to have peaked during the year, with NII in the 4QFY2023 down by 2 bps q-o-q dragged by a 6 bps fall in NIMs.
“However, levers such as loan growth, fee income and large general provision overlays should allow the group to keep earnings supported at current levels,” he adds. “Its shift to deliver higher base dividends, bonus share issues and potential special dividend increases capital returns visibility and dividend yield certainty, amidst an environment where risk free rates are set to fall.”
While the analyst deems DBS’s asset quality to be “well supported”, he expects credit charges to rise to 17 bps in FY2024 from 14 bps in FY2023. This stems from higher specific provisions taking into account the higher interest rate environment.
In FY2024, Wickramasinghe estimates DBS to report a Common Equity Tier 1 (CET-1) ratio of 14.3%, down from its FY2023 CET-1 ratio of 14.6%. “This gives further capital return opportunities, in our view, including special dividends going forward.”
The analyst has also lowered his target price to $37.66 from $37.81 following his adjustments for FY2023. He has kept his estimates for the FY2024 to FY2025 unchanged pending better clarity on the macro momentum.
OCBC Investment Research (OIR) analyst Carmen Lee has kept her “buy” call with an unchanged fair value estimate of $39 as DBS’s 4QFY2023 results stood slightly below the expectations of the market.
A huge plus for the bank, in Lee’s view, is its high dividend yield. In her report dated Feb 7, Lee believes that this will remain an attractive attribute for long term investors.
UOB Kay Hian analyst Jonathan Koh has kept his “buy” call as DBS’s 4QFY2023 net profit met his expectations.
Like most of his peers, Koh has lowered his target price to $39.20 from $40.25 previously. However, he has raised his earnings forecast by 1.8% in FY2024 to $9.99 billion due to higher treasury income.
PhillipCapital analyst Glenn Thum has kept his "buy" call on DBS as the bank's adjusted patmi for the 4QFY2023 stood slightly above his estimates due to the higher NII, fee income and other non-interest income offset by higher allowances. DBS's FY2023 adjusted patmi stood at 102% of Thum's estimates.
However, he has lowered his target price to $38.90 from $41.60 as he decreases his FY2024 earnings estimates by 1% to $10.41 billion. The lower earnings target comes as Thum lowers his NII estimates due to lower NIMs with increased allowance and operating expenses (opex) estimates for the FY2024. The earnings estimates also takes into consideration higher fees and other non-interest income, says Thum.
Goldman Sachs keeps 'sell' call
Goldman Sachs analysts Melissa Kuang and Olivia Shi have kept their "sell" call and target price of $34.80 as there is "nothing to change [their] view" despite the cautious optimism from the bank's management. In addition, Kuang and Shi note that shares in DBS are trading at 1.4 times its forward P/B, above its historical 10-year average and at a 39% premium to its peers.
"Post results and further details from the analyst briefing, we see no change to our view that DBS remains a solid franchise but that earnings will likely face headwinds from rate cuts," write Kuang and Shi in their report dated Feb 7.
"Our forecast differs from DBS's guidance: we expect net income to fall by 3% y-o-y as we remain cautious and bake in some provisions for commercial real estate (CRE) which sees our credit forecast at 25 bps for FY2024 and NIMs fall by 9 bps y-o-y with our economist anticipating five Fed rate cuts but to start in May," they add.
Shares in DBS closed 1 cent higher or 0.03% up at $32.46 on Feb 8.
