DBS holds $100 bil market cap for second day; analysts mixed on 1QFY2024 results

Analysts are mixed over DBS despite the record earnings.

The ‘buy’ calls

Analysts from Maybank Securities, RHB Bank Singapore, UOB Kay Hian and Citi Research have kept their “buy” calls with raised target prices.

Maybank’s Thilan Wickramasinghe lauded DBS’s “strong results”, with the bank’s numbers “well ahead” of his expectations.

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However, he recognises that the record earnings may not repeat in the same magnitude going forward due to a more bearish interest rate cut environment versus the beginning of FY2024.

That said, he notes that DBS’s wealth management seems to have “turned a corner” and that its net interest income (NII) could be “supportive” for a longer period of time in a higher rate environment.

On the back of DBS’s results, the analyst has upgraded his earnings estimate for FY2024 to FY2026 by 1% to 6%. Accordingly, his target price has also increased to $38.87 from $34.24, adjusted for DBS’s 1-for-10 bonus issue.

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“Despite its current dividend policy of 54 cents on an enlarged share-base, DBS is likely to accrue more capital than it pays out. We expect further capital management actions including potential special dividends going forward,” he writes.

The research team at RHB Bank Singapore has also increased its earnings estimates for FY2024 to FY2026 by 7% after DBS’s 1QFY2024 results surpassed its estimates.

“We believe the dividend yield and yield compression investment thesis for DBS remains intact. There could be further upside to capital returns should capital-light, non-interest income continue to drive its bottomline,” the team writes.

As a result, the team’s target price has been lifted to $38.90 from $34.80 (ex-bonus).

“DBS will continue to explore opportunities to return excess capital. Its capital build has been solid, despite the 70 basis point regulatory capital penalty,” adds the RHB team.

To UOB Kay Hian’s Jonathan Koh, DBS’s 1QFY2024 net profit was “significantly above” his expectations. As a result, he, too, has raised his FY2024 earnings forecast by 8% due to the stronger wealth management fees and treasury income.

His target price is also raised to $40.70, the highest among the brokerages, from $39.32 previously. The new Gordon growth model (GGM)-based target price represents 1.74 times DBS’s FY2025 P/B.

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Unlike his peers, Citi’s Tan Yong Hong has kept his target price unchanged at $37.50, which implies 1.7 times to DBS’s FY2024 P/B.

The analyst sees further room for capital management due to the penalty by the Monetary Authority of Singapore (MAS), which requires DBS to apply 1.8 times to its operational risk-weighted assets (RWA). If lifted, the move will bring DBS’s common equity tier 1 (CET-1) ratio to 15.6% from 14.7% previously. The impact on DBS’s dividend will be 40 basis points, Tan notes.

“[The] timing is uncertain but [DBS’s] chief information officer will join [the bank] on May 10 and MAS also recently lifted six-month moratorium on non-essential activities,” he writes.

Two days after the end of MAS’s six-month pause on non-essential activities, DBS’s and POSB’s internet banking services were disrupted, leaving some of its users unable to log in.

To Tan, the anticipation of DBS’s capital management should drive a further re-rating in the bank’s shares, which could be done via an ordinary or special dividend or portfolio mergers and acquisitions (M&A).

Tan has also upgraded his NII estimates for FY2024, seeing group NII to grow y-o-y instead of remaining flat for the full year. This is due to the expectation of two cuts from the US Federal Reserve (US Fed), down from five cuts, as well as slower-than-expected current accounts savings accounts (Casa) migration and higher repricing of fixed assets.

The ‘accumulate’ and ‘hold’ calls

PhillipCapital analyst Glenn Thum has downgraded his call to “accumulate” from “buy” previously even though DBS’s 1QFY2024 patmi stood “slightly above” his estimates at 28% of his FY2024 forecast.

The downgrade comes due to DBS’s recent share price outperformance and its 1-for-10 bonus issue.

That said, Thum has also increased his FY2024 earnings estimates by 2% as he ups his NII estimates due to higher net interest margins (NIMs), fee income and loan growth estimates.

“We assume a 1.83 times FY2024 P/BV and return on equity (ROE) estimate of 17.1% in our GGM valuation,” he writes.

“Modest growth in NII from stable NIMs, low-single-digit loan growth, and double-digit growth in fee income will sustain earnings momentum,” he adds.

CGS International analysts Andrea Choong and Lim Siew Khee have kept their “hold” call but with a higher target price of $35.90 from $34.40 previously.

To the analysts, DBS’s 1QFY2024 reflected a “strong showing” and returning “risk-on” sentiment.

“Although geopolitical risks persist, we sensed a more positive tone in the delivery of management’s update on its FY2024 outlook,” they write.

In addition to their higher target price, the analysts have raised their earnings per share (EPS) estimates by 3% to 5% for the FY2024 to FY2026 to factor in a stronger non-interest income and sustained NIMs.

“DBS’s net profit trajectory places it on course for the upper-end of its 15% - 17% ROE guidance for the medium term in FY2024,” the analysts say.

“The release of excess capital remained a key discussion point in its earnings briefing,” they add, noting the rise in DBS’s pro-forma CET-1.

“Put against the upper-end of its optimal CET-1 range of 12.5% - 13.5%, this translates into a potential $3 dividend per share (DPS) to be released, though the removal of the penalty, form of shareholder return (whether as core/special DPS or M&A), and timeline of both these actions are uncertain, if at all,” they continue.