4Q21: Asset Quality And Dividend Surprise Are Upsides
DBS’ 4Q21 results were in line with our expectations. Loan growth at 9.9% was the highest in seven years. NPL ratio receded from 1.5% to 1.3% due to full repayment of two significant NPLs. Quarterly dividend increased 9% qoq to 36 S cents. We expect four rate hikes each in 2022 and 2023. We expect NIM to expand 15bp and 13bp respectively to 1.61% in 2023 and 1.74% in 2024. We expect dividend yield to improve from 3.9% in 2022 to 4.2% in 2023. Maintain BUY. Target price: S$40.00.
RESULTS
• DBS Group Holdings (DBS) reported net profit of S$1,393m for 4Q21, up 37% yoy but down 18% qoq. The results were in line with our net profit forecast of S$1,490m.
• Fastest loan growth in seven years. Loan growth was 9.9% yoy and 0.9% qoq in 4Q21. On a constant-currency basis, non-trade corporate loans expanded S$5b qoq, driven by Singapore and Hong Kong. Consumer loans grew S$2b qoq with expansion from housing loans and wealth management loans. NIM was stable at 1.43%.
• Non-interest income seasonally softer. Non-interest income dropped 21% qoq in 4Q21 due to seasonally lower net trading income and less gains from investment securities. Fees grew 9.1% yoy but eased 8.9% qoq. Contributions from loans-related fees and wealth management dropped sequentially by 27% and 18% qoq.
• Cost/income ratio seasonally higher at 50.7%. Operating expenses increased 5.8% yoy due to government grant available in the previous year. Underlying operating expenses were stable despite base salary increments carried out mid-year.
• Asset quality improved. NPL balance contracted 11.7% qoq due to full repayment of two significant NPLs in the transportation, storage & communications sector in Singapore in 4Q21. NPL ratio declined from 1.5% to 1.3%. Specific provision was a paltry S$67m (4Q20: S$363m) and DBS wrote-back general provisions of S$34m (3Q21: S$138m).
• Rewarding shareholders with more dividends. The board has proposed dividend of 36 S cents for 4Q21, representing an increase of 9% qoq.
STOCK IMPACT
• Guidance for 2022. Management maintained guidance of mid-to-high single digit loan growth (6-7%) and double digit fee income growth in 2022. Total income is expected to grow at mid-single digit.
• Sensitivity to US rate hikes. Management estimated positive impact to net interest income at S$18-20m for every 1bp increase in US interest rates. Management’s base case assumption is four rate hikes of 25bp each in 2022 (one hike per quarter), translating to additional total income of S$1,800-2,000m with full impact in 2023.
• More write-back of general provisions in 2022. Total provisions are expected to remain low at S$0-100m in 2022 (2021: S$52m) as outlook for asset quality remains benign. DBS has management overlay for general provisions of S$1.5b. Its general provisions exceeded MAS’ requirement by S$0.4b. Management has set up a framework to determine the amount of general provisions to be written back based on parameters, such as government relief measures, roll off of loan moratorium, delinquency rates, re-opening of international borders and COVID-19 stringency index.
• Optimistic on new growth platforms. DBS has recently embarked on inorganic expansion through amalgamation of Lakshmi Vila Bank and acquisition of 13% stake in Shenzhen Rural Commercial Bank (SZRCB) and Citi Consumer Taiwan (completion in mid-2023). SZRCB contributed associate income of S$26m in 2H21. Management expects these new businesses to add S$1.2-1.3b to total income and S$0.5b to net profit per year.
• MAS has imposed additional capital requirement of S$930m on DBS, which translate to a negative impact of 0.4ppt to its CET-1 CAR, as a result of the widespread unavailability of digital banking services during 23-25 Nov 21. MAS has applied a multiplier of 1.5x to its risk weighted assets for operational risk, which is more punitive compared to the multiplier of 1.2x imposed previously when DBS experienced a similar disruption in 2010. DBS has conducted a series of reviews of its systems and processes. The additional capital requirement will be reviewed when MAS is satisfied that DBS has addressed the identified shortcomings.
EARNINGS REVISION/RISK
• We expect four hikes in 2022 (previous: three hikes), four hikes in 2023 (previous: three hikes) and no hike in 2024 (previous: two hikes).
• We raise our net profit forecast for 2022F by 4% due to NIM expansion and muted credit costs of 4bp. We trimmed our net profit forecast for 2023F by 0.7% as positive impact from NIM expansion is overcome by slight moderation in loan growth and less gains from investment securities.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$40.00 is based on 1.67x 2023F P/B, derived from Gordon Growth model (ROE: 12.3%, COE: 8.0%, Growth: 1.5%).