Analysts from RHB Bank Singapore and Citi Research are seeing minimal impact to DBS Group Holdings D05 after the Monetary Authority of Singapore (MAS) imposed an additional capital requirement on the bank on May 5 following the “widespread unavailability” of DBS’s digital banking services.
The bank’s digital banking services were disrupted on March 29 and subsequently on May 5.
Together with the additional capital requirement imposed on the bank in February 2022, this translates to around $1.6 billion in total additional regulatory capital, said the central bank in its May 5 statement.
DBS added that the supervisory action would have an incremental 0.3 percentage point (ppt) or 30 basis point (bps) impact on DBS's CET1 ratio ended March 31, reducing it to 14.1% from 14.4%. Despite the reduction, the new ratio still remains above the bank’s target range of 12.5% to 13.5%.
RHB’s Singapore research team has kept its “neutral” call with an unchanged target price of $35.70 following the news.
“While the 30 bps impact on CET1 ratio is unlikely to affect dividend payout for FY2023, we believe the digital glitch, coupled with the negative revisions in FY2023 guidance post-1QFY2023 results would weigh on share price performance,” the team writes.
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“Furthermore, DBS estimates a 200 bps enhancement to its CET1 ratio from the Basel IV adjustments (implementation date to be announced in July),” it adds.
To this end, the team has also kept its dividend forecast of $1.76 for FY2023, which translates to a dividend payout of 43% for the year, down from 47% in FY2022. DBS’s dividend for FY2022 included a special dividend of 50 cents.
In environmental, social and governance (ESG) terms, the team has tweaked its ESG weightage to put greater focus on the environmental or E pillar due to critical climate change issues.
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“Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars,” the team writes.
Citi’s analyst Tan Yong Hong notes that DBS’s CET1 ratio of 14.5% for FY2023 will remain “robust” in spite of the supervisory action.
“Using 12.5% - 13.5% target CET1 ratio range, DBS still enjoys $2.1 billion - $5.7 billion of excess capital after adjusting for MAS’s additional capital requirement,” says Tan in his unrated report.
Citi has suspended its rating on DBS since Jan 28, 2022, due to the bank’s acquisition of Citi’s consumer banking business in Taiwan.
“Based on management’s guidance, transition to Basel-IV will further lift CET1 ratio by [around] 2 ppts and implementation dates to be announced in July this year. Overall the additional capital requirement does not impact dividend policy especially given the excess capital and capital ratio lift from Basel-IV,” adds Tan.
DBS, which will hold its investor day on May 22, is likely to face questions on its information technology (IT) resiliency given the three outages since November 2021, the analyst notes.
He adds that key highlights on the day could be on the bank’s digital consumer and small- and medium-sized enterprises (SMEs) in Singapore and Hong Kong, which drives 34% of the bank’s income in FY2022. The digital consumer and SME segment delivered 39% return on equity (ROE) compared to the traditional 24% to the bank’s FY2022 financial results.
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Another focus on the day will be on DBS’s digital platforms and technology services.
“DBS has invested in/launched several high quality digital platform and technology initiatives that may take time to develop but might potentially offer value upside in the future,” says Tan.
Margins ‘peaked out’ after 1QFY2023, say analysts
OCBC Investment Research (OIR)’s research team has kept its “buy” call after DBS’s results for the 1QFY2023 ended March with an unchanged fair value of $39.
The team’s report comes after the bank’s “solid” results came in above its expectations.
In its report, OIR’s team also notes that while Singapore banks could see further rise in net interest margins (NIMs) and net interest income (NII) from a year ago, the pace of margin expansion should moderate with rising deposit costs.
“For FY2023, the bank expects healthy business momentum with some pockets of moderation. Management has guided for 3% - 5% loans and single-digit fee income growth this year with sustained card fee growth supported by ongoing travel recovery, while wealth and investment banking growth should be dependent on market conditions,” says the team.
“Risks to monitor ahead include the impact of increased macroeconomic uncertainties globally on interest rates, income generation, credit demand and asset quality trends,” it adds.
“While asset quality remains benign, modest normalisation is likely in a scenario of softer global growth, which should remain manageable for the sector but could weigh on loan growth, credit cost and non-performing loan (NPL) trends over the medium term,” it continues.
Maybank Securities' Thilan Wickramasinghe has also kept his "buy" call but with a lower target price of $38.51 from $39.12 as DBS's first-quarter earnings beat his expectations.
"Strong trading income was a key contributor, but so was resilient NII," he writes.
He adds that the bank's NIM could remain "higher for longer" compared to the period before FY2022 though NIM growth is likely to fade.
Another bright spot is wealth management, which has languished, could see an inflection going forward.
That said, the analyst notes that asset quality remains a key risk and he expect NPLs to start picking up going forward as global growth slows. "Nevertheless, DBS’ strong capital and liquidity levels, plus structurally higher ROEs should continue to support flight-to-quality flows," he says.
Meanwhile, CGS-CIMB Research’s Andrea Choong and Lim Siew Khee have kept their “hold” call with a lowered target price of $35.30 from $35.70 previously as they see DBS’s margins peaking out.
“Notwithstanding the strong 1QFY2023 performance, the spotlight during DBS Group’s earnings briefing was on the bank’s lowered FY23F guidance on loans and fee growth, NIM, and treasury income,” note the analysts.
They add that a bright spot in DBS’s results was their resilient asset quality even through various stress tests such as energy prices and inflation.
“On loan growth, DBS’s 3% - 5% FY2023 guidance now incorporates softer mortgage growth (due to recent property cooling measures) and softer wealth management financing (given customers’ high cash levels). Treasury income may moderate as customer hedging demand cools, in our view,” the analysts add.
On DBS’s NIMs, Choong and Lim note management’s NIM estimate of 2.05% - 2.1% in FY2023 with expectations of the US Federal Reserve (US Fed) rates peaking at 5.25% in May and holding for the rest of the year.
As such, the analysts have cut their NIM expectations to around 1.95% - 2.08% over FY2023 to FY2025 to reflect these repricing pressures.
They have also reduced their earnings per share (EPS) estimates by 1% to 7% over the same period on the back of lower NIM expectations and reduced loan growth estimates.
In addition, Choong and Lim have cut their credit costs for the FY2024 to FY2025 slightly given the “large management overlay buffers accumulated ($2.1 billion in 1Q2FY2023)”.
On Basel IV, the analysts see that the implantation will give the bank a transitional 2 ppt uplift to its CET1 ratio.
This will allow the bank the option of not replacing its Additional Tier 1 (AT1) securities of $1 billion and US$1 billion ($1.32 billion) issuances outstanding, with call dates in 2025, they note.
The analysts’ report, which came before MAS’s additional capital requirement on May 5, notes that DBS may consider raising its ordinary dividend or declaring special dividends due to their CET1 ratio being above its targeted 12.5% - 13.5% range.
At its share price of $32.95 as at the analysts’ report dated May 3, Choong and Lim note that the bank is trading at around 1.4x of its FY2023 P/B, potentially pricing in peaked margins.
UOB Kay Hian's Jonathan Koh has also kept his "buy" call, also with a lowered target price of $41, from $41.80 previously.
He has also lowered his earnings forecast by 1.5% for FY2024 due to the NIM moderation but offset by improved cost efficiency.
As at 3.16pm, shares in DBS are trading 7 cents higher or 0.22% up at $31.97.
