CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee are keeping their “buy” call on DBS Group Holdings with an unchanged target price of $40.20 ahead of the bank’s results for the 2QFY2022 ended June.
DBS will be releasing its results for the quarter and the 1HFY2022 on the morning of Aug 4.
In their report dated July 19, the analysts are expecting the bank to report a stronger net interest margin (NIM) expansion of 10 basis points (bps) q-o-q to 1.56% for the 2QFY2022, compared to the 3 bps q-o-q increase seen in the 1QFY2022. The NIM expansion will offset the weakness in fees, which may be weighed down by the risk-off sentiment in wealth management income, the analysts say.
They add that the bank’s rise in NIM for the 3QFY2022 may be more pronounced given the lagged pass-through of the 50 bps and 75 bps Fed rate hikes in May and June respectively.
In addition, the analysts see other fee income such as credit cards should hold up well as travel spending rebounds. Steady trading income from stronger customer flows could help as well, in their opinion.
Further to their report, the analysts expect DBS’s management guidance on economic growth, as well as its take on asset quality in the 2HFY2022, to be a key focus in its results for the quarter.
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“We understand that portfolio stress tests are benign at this juncture but DBS remains cautious in its provisioning stance,” the analysts write. “DBS’s 2QFY2022 credit costs likely normalised towards its 15 bps – 20 bps run rate (1QFY2022: 5 bps) as it held on to its management overlays ($1.5 billion) as a buffer.”
“We understand that impairments could come up to $100 million if DBS were to reverse these overlays,” they add. “On the ground, although there have been some concerns on borrower repayment capabilities as fixed (for [around] two to three years) mortgage rates have risen to 3% in June (from 1.5% in January), the bank’s 50% loan-to-value (LTV) ratio for its Singapore mortgage portfolio provides comfort.”
DBS has not highlighted any stresses for this portfolio so far, although materially higher credit costs given a recession is a key downside risk, the analysts continue.
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To this end, Choong and Lim are expecting the bank’s net profit for the 2QFY2022 to come in at around $1.73 billion, which represents a growth of 1% y-o-y and a 4% decline q-o-q.
Loan growth for the quarter is forecasted to come in at 1.5%, mainly driven by corporate demand.
“An analysis factoring in Fed rate hike expectations (Bloomberg consensus forecasts) would result in FY2022/FY2023 NIMs of [around] 1.7%/2.1% ([compared to] our current expectation [of] 1.6%/1.9%),” they write.
“Incorporating credit cost of 15 bps in FY2022F/FY2023 ([from] our current forecast [of] 2 bps/10 bps) would still raise our FY2022/FY2023 earnings per share (EPS) by 2%/14%,” they add.
Given these factors, the analysts project that DBS would see net profit growth of 33% y-o-y in the FY2022 and 14% y-o-y for the FY2023, which are both stronger compared to their peers’ growth estimates.
As at 11.53am, shares in DBS are trading 32 cents lower or 1.04% down at $30.53.
