After a record-breaking FY2023 ended Dec 31, 2023, when DBS Group Holdings reported $10.3 billion in net profit, a first for a Singapore company, the local bank beat analysts’ estimates by reporting a 30% q-o-q and 15% y-o-y increase in net profit to $2.96 billion for the 1QFY2024.
Shareholders will be happy that the bank’s dividend per share was maintained at 54 cents, including bonus shares, representing a 10% increase. The dividend payout of $1.536 billion works out at 52%.
Market capitalisation crosses $100 bil
It is unsurprising, then, that DBS witnessed its market capitalisation soar past the $100 billion mark, marking another first for a Singapore-listed company.
Shortly after the market opened on May 2, shares in DBS gained as much as 3.15%, but eased slightly to end the day at $35.55, up 1.86%. At this level, DBS has a market cap of $101.2 billion.
Based on guidance at DBS’s results briefing on May 2, shareholders are likely to get higher dividends this year despite having 10% more in shares following the recent bonus issue. The bank’s net interest margins (NIMs), a much-watched figure, are likely to be better than FY2023’s 2.16%.
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DBS’s commercial book non-interest income growth is likely to be in mid-to-high teens percent. In the 4QFY2022, DBS changed its reporting to segregate the commercial book’s net interest income (NII), non-interest income (non-II) and NIM from its markets trading NII. Taking both into account for the 1QFY2024, NIM rose 1 basis point (bp) q-o-q and 2 bps y-o-y to 2.14%.
With double-digit growth in non-II, total income growth is being guided higher, at 1-2 percentage points above a previous guidance of mid-single digits. If NIM holds up along with a glacial loan growth, DBS’s net profit could well beat last year’s $10 billion, says Gupta, which is a positive for shareholders looking for more dividends.
Interestingly, there were no writebacks and a small one-off in the form of an expense item for Citi Taiwan. Instead, specific provisions (which are now referred to as expected credit loss or ECL 3) rose y-o-y 82% y-o-y but fell 19% q-o-q to $113 million, representing credit costs of just 10 bps.
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Group CEO Piyush Gupta cautions that investors should be prepared for through-the-cycle credit costs of 17 bps to 20 bps. “The fact that we have a very benign environment is actually a little bit surprising given where the interest rates are. We are obviously watching it very closely, particularly in Hong Kong.”
“We explained last quarter that the Hong Kong commercial real estate book is about $18 billion, but the bulk of it is to the very top end of the market. We have stress-tested that portfolio even through the quarter, assuming a 50% drop in prices from where they are and assuming there is no income accretion. We’re not seeing any pressure or problems with that with that book or in any other place,” he says.
There was a one-off $100 million gain on foreign exchange hedges made for overseas opportunities. This may or may not be repeated, depending on the way the markets move.
Asset liability management to protect NIM
While the bulk of the improvement from interest rates was in 2022 and 2023, Gupta says the bank will still be able to get some improvement from its asset-liability management. For one thing, on the liability front, the Casa (current account savings account) outflow has slowed even though the 1% y-o-y rise in deposits was mainly from fixed deposits. And, out of the $40 billion in assets to be repriced, $16 billion has been repriced at higher yields. Meanwhile, DBS is likely to give up short-term gains to protect yields over a longer period.
According to DBS’s press release, the higher commercial book income was due to an improvement in NII, which stemmed from a better-than-expected NIM of 2.77%, 2 bps higher q-o-q due to the repricing of fixed-rate assets and despite the lower Hong Kong Interbank Offered Rate.
The bank’s loans, which stood at $431 billion as at March 31, came in more robust than expected. While growth was broad-based, Gupta revealed that a chunk of the loans was from Singapore and India. The latter saw broad-based growth, while Singapore’s loans were from the government land sales and commodities. During the quarter, DBS’s loans were up by 1% q-o-q in constant-currency terms, due to higher non-trade corporate loans of 3%. Trade loans and consumer loans were little changed.
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Non-interest income boost
Elsewhere, net fee and commission income rose by 23% y-o-y to $1.04 billion, crossing the $1 billion mark for the first time. The bank’s fee income was also “pleasing” as all segments – except investment banking – grew on a y-o-y and q-o-q basis. Wealth management fees stood at $536 million for the 1QFY2024 with wealth management fees up 44.9% q-o-q. Excluding Citi Taiwan, DBS’s wealth management fees still grew 35%.
To Gupta, its wealth management books improved as its customers were beginning to put their money into investment products. The growth was also partly from the low base in the 1QFY2023 from the Credit Suisse impact.
Net new money, which stood at around $6 billion for the quarter, also remained on track to see the same amount of close to $24 billion in FY2022 and FY2023.
“A lot of the money, when they first come in, is through fixed deposits. When the market improves and people’s animal spirits come up, they’re putting their money to work,” Gupta explains.
Treasury customer sales and other income also marked a new record at $621 million, 44% higher y-o-y, as the bank saw a record number of treasury customer sales. The better all-round performance helped to improve DBS’s common equity tier 1 (CET-1) ratio by 1 bp q-o-q and 2 bps y-o-y to 14.7%. The bank’s liquidity remained healthy with its net stable funding ratio and liquidity coverage ratio of 116% and 144% respectively, well above the regulatory requirements.
While all metrics look robust for the bank with no obvious signs of stress anywhere, Gupta remains concerned over DBS’s investment banking fees. Equity capital markets have been “completely moribund” with only some issuance for debt capital markets in China and a slower space within the G3 economies, the US, Eurozone and Japan, he says.
At present, the bank will be focusing on what it does best — banking and distributions. When asked about having its own insurance arm instead, Gupta notes that manufacturing insurance requires a “very different” set of skills and would require the bank to run two separate companies. “There is no obvious synergy between the two,” he says.
“We’ve found that just being a distributor [of insurance products] as opposed to [being] a manufacturer has proven to be very, very good for us,” he explains, noting that it is best for the bank to work on its core competencies and bring value to its shareholders. It is also a “better use of capital and management capabilities”.
To further illustrate his point, Gupta says making jam and selling them is a lucrative and “great” business, but clearly that is not something the bank will do.
Technical updates
DBS’s six-month pause on conducting non-essential IT changes by the Monetary Authority of Singapore (MAS) ended on April 30. While there will be no extensions, the multiplier of 1.8 times to DBS’s risk-weighted assets (RWA) for operational risk will be kept.
At the briefing, Gupta says the bank has made “substantive progress”, with the CEO “quite pleased” with the bank’s progress over the last six months. The improvements include a quicker recovery process and greater transaction certainty, although Gupta recognises that the bank still has a lot more work to do.
“In terms of residual requirements, I think, for specific activities, we’re about 90% done. We have a long tail. But we also need to tighten up a little bit more on some of our non-Singapore locations,” he says. “If I were to hazard a guess, in terms of what we need to get done, [it] is going to take us most of this year.”
As to when MAS will remove the 1.8 times multiplier, Gupta notes that it is up to the central bank to decide, although it has been evaluating the bank on an ongoing basis.
Analysts keep estimates
Analysts from CGS International (CGSI) and Citi Research have kept their calls and estimates on DBS after its results surpassed expectations of the consensus polled by Bloomberg.
CGSI analysts Andrea Choong and Lim Siew Khee have kept their “hold” call and target price of $34.40 even though DBS’s core net profit for the 1QFY2024 also surpassed their estimates, forming 29% of their full-year forecast.
While they expect the markets to react positively, the analysts remain neutral on DBS’s prospects as they see “limited” growth in the bank’s earnings over FY2025 to FY2026, given the impending rate cuts from the US Federal Reserve (Fed).
Citi analyst Tan Yong Hong is more upbeat on DBS’s prospects with his “buy” call and unchanged target price of $37.50, as he sees further room for capital management. DBS’s asset quality was also more robust than expected.
“MAS’s capital penalty which requires DBS to apply 1.8 times operational RWA impacts [the] group’s CET-1 ratio by 0.7%, which if lifted, brings 1QFY2024 CET-1 ratio 14.7% to 15.6%,” he notes. The impact on DBS’s dividend for the 1QFY2024 is 40 bps.
To Tan, the anticipation of capital management, which could be done via ordinary and/or special dividends or mergers and acquisitions, should drive a further re-rating in DBS’s shares.
For FY2024, Tan has upgraded his NII estimates, estimating group NII to grow by y-o-y driven by two Fed cuts, up from his previous estimate of a flat NII from the five expected Fed cuts. The higher estimated NII is also due to the slower-than-expected Casa migration and higher repricing for fixed assets.
Bloomberg Intelligence analysts Rena Kwok and Sheenu Gupta see DBS’s funding costs to be “key” amid high rates.
“DBS might need to prioritise its funding-cost strategy after its low-cost deposit ratio fell to 51% in the 1QFY2024 from 53% in the 4QFY2023 as the Fed keeps its benchmark rates at a 23-year high. The bank, facing ample liquidity and tepid lending, may consider a strategic repricing of costlier fixed deposits — similar to UOB — to contain funding costs,” they write.
