DBS Group Holdings D05 may have reported record net profit of $8.19 billion for the FY2022 ended Dec 31, 2022, but CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee warn that net interest margin (NIM) could start stabilising.
“DBS delivered a relatively strong set of results in 4QFY2022, as NIM expansion continued to make up for softer fees as risk sentiment stayed low, prompting wealth management inflows to stay on the sidelines,” write Choong and Lim in a Feb 14 note.
At the release of DBS’s results on Feb 13, Choong and Lim maintained their “hold” call with an unchanged target price of $36.50.
Following a briefing with management, however, Choong and Lim cut their target price to $35.70, while maintaining “hold” on Southeast Asia’s largest bank by total assets.
DBS toned down its peak NIM expectations in FY2023 to 2.2%, from 2.25% previously. “This is due to heftier funding cost pressures from an outflow of current account, savings account (CASA) into instruments such as Treasury bills (T-bills), offering very competitive yields,” notes CGS-CIMB’s Choong and Lim.
Further, the Singdollar strength had also affected the pass-through from Fed rate hikes into NIMs. Although DBS may be expected to be a key beneficiary if Fed rates continue rising, the corresponding rise in funding costs could cap the NIM expansion, add the analysts.
See also: 'Buy' banks ahead of FY2022 results, OCBC profit to exceed estimates: PhillipCapital
“We think NIM upside from higher Fed rates is priced in, while earnings upside from a pick-up in wealth management could take time as rates stay higher for longer,” say Choong and Lim.
Meanwhile, Citi Research analysts Tian Yafei and Tan Yong Hong think funding costs should stabilise as time deposits rates offered by most banks have generally declined. MAS Treasury bills (T-bills) yields also have tapered off, they add.
Within DBS’s Singapore mortgage book, 50% is fixed, 32% is linked to fixed deposits, 10% is based on SORA and 5% is based on SIBOR, driving further asset repricing, note Tian and Tan in a Feb 13 note.
“Even if terminal rates were to move higher, [there is] limited upside to peak NIM due to rising funding costs,” say Tian and Tan. Citi’s report is unrated as DBS moves to acquire Citi's consumer banking business in Taiwan.
Two banks to follow
United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC) will report their FY2022 results on Feb 23 and 24 respectively.
DBS’s board proposed a final dividend of 42 cents per share, six cents higher than its previous payment, bringing the total payout for FY2022 to $2 per share. The board also proposed a special dividend of 50 cents per share given its “strong capital base”.
As the first to report 4QFY2022 results, DBS's figures will “set expectations for the sector”, said OCBC Investment Research analysts in a Feb 7 note, before results were released.
Ahead of DBS’s results yesterday, OCBC analysts maintained “hold” on DBS with a target price of $39.00.
Meanwhile, UOB Kay Hian Research analyst Jonathan Koh maintains “buy” on DBS after the results release, with a higher target price of $45.35.
See also: T-bills tide to turn in May, says DBS's Piyush Gupta
Koh notes the DBS harbours a goal of achieving $10 billion net profit in 2023. “Management has guided mid-single-digit loan growth and double-digit fee income growth for 2023. It foresees downside risk of 5-7 basis points (bp) to its guided peak NIM at 2.25% due to outflow of deposits to treasury bills and a stronger Singdollar, which reduces the pass-through from higher US interest rates to domestic interest rates.”
Management expects operating expenses to increase 9%-10% and cost-to-income ratio to fall below 40% in 2023. It expects specific provisions of 10-15 bps.
According to Koh, DBS’s management appears more inclined to increase its regular quarterly dividend, “although it does not rule out other avenues of returning capital to shareholders, including special dividend and share buyback”.
Management has become more optimistic of the macro outlook due to China easing regulations and introducing new measures to support the residential property market, and delinquencies for loans being relatively unchanged despite pressure from higher interest rates. “Confidence should return to markets as the rate hikes ease and China reopens,” says Koh.
Koh raises his earnings forecast for DBS by 2% for 2023 due to lower specific provisions of 20 bps from 25 bps previously.
As at 12.35pm, shares in DBS are trading 25 cents lower, or 0.71% down, at $35.07.
