DBS benefitted from the first quarter of NIM expansion in three years of 3bp qoq to 1.46% in 1Q22. There was healthy growth in loans-related and cards fees. SZRCB contributed S$66m to other non-interest income. DBS maintained quarterly dividend at 36 S cents. Interest rates are on the rise and we expect NIM to improve to 1.50% in 2022 and expand 23bp to 1.73% in 2023. DBS provides attractive dividend yield of 4.2% for 2022 and 4.4% for 2023. Maintain BUY. Target price: S$37.25.
RESULTS
· DBS Group Holdings (DBS) reported net profit of S$1,801m for 1Q22, down 10% yoy but up 30% qoq. The results were above our net profit forecast of S$1,700m.
· First quarter of NIM expansion in three years. Loan growth was 8% yoy and 2% qoq in 1Q22. Non-trade corporate loans expanded 2% qoq driven by Singapore and Hong Kong. Trade loans grew 5% qoq amidst higher commodity prices. NIM expanded 3bp qoq to 1.46% benefitting from the hike in Fed Funds Rate of 25bp in March and the associated increase in loan yield.
· Customer deposits grew 9% yoy and CASA ratio has improved 16ppt to 75% compared to pre-pandemic levels.
· Growth from loans-related and cards fees. Fees & commissions dropped 6% yoy but rebounded 7% qoq in 1Q22. Contribution from wealth management declined 21% yoy due to lower investment products sales offset by higher bancassurance income. Loans related fees grew 21% yoy. Cards fees increased 11% yoy due to pick-up in travel spending and has already exceeded pre-pandemic levels.
· Investment in SZRCB paying off so far. Other non-interest income dropped 16% yoy in 1Q22 due to lower net trading income, less gains from investment securities and a higher base last year. Shenzhen Rural Commercial Bank (SZRCB) contributed S$66m to other non-interest income in 1Q22.
· Cost-to-income ratio healthy at 44%. Operating expenses increased 4% yoy. Staff costs increased 8% yoy due to base salary increment instituted in mid-21.
· Up-tick in new NPL formation. We saw an up-tick in new NPL formation by 60% qoq to S$465m and NPL balance increased 2% qoq in 1Q22. NPL ratio was unchanged at 1.3%. Specific provisions were S$167m or 15bp, which was partially offset by write-back general provisions of S$112m (credit upgrades and transfers to NPLs).
· The board has proposed interim dividend of 36 S cents for 1Q22.
STOCK IMPACT
· Headwinds from macro environment. Management sees macroeconomic headwinds from higher inflation, supply chain disruptions and COVID-19 outbreak in mainland China. Companies will be affected by second order impact from the Russia-Ukraine War through higher energy and commodity prices. Some companies may not be able to push through increase in pricing, resulting in margin compression. SMEs will increasingly feel the burden of debt servicing due to higher interest rates. Nevertheless, DBS’ SME portfolio is seasoned and largely secured. On a bottom-up basis, DBS has stress tested exposures to vulnerable sectors but did not uncover areas of concern.
· Guidance for 2022. Management expects loan growth of 1-2% qoq in 2Q22, bringing loan growth in 1H22 to 3-4%. Loan growth for full year 2022 is expected at mid-single digit if growth slows in 2H22. Management sees a mixed outlook for fee income. While contribution from cards is expected to benefit from domestic and border reopening, fees from wealth management and investment banking would be highly dependent on market conditions. Operating expenses are expected to be slightly higher than 2021.
· Sensitivity to US rate hikes. Management estimated positive impact to net interest income at S$18-20m for every 1bp increase in US Fed Funds Rate. Thus, rate hikes of 100bp in 2022 would translate to additional net interest income of S$1,800-2,000m with full impact in 2023.
· Management expects to complete the acquisition and full integration of Citi Consumer Taiwan in Jun 23.
EARNINGS REVISION/RISK
· We expect successive hikes of 50bp during upcoming FOMC meetings on 3-4 May and 14-15 June. We have factored in the impact of Fed Funds Rate rising to 2.5% by end-22. We expect NIM to improve to 1.50% in 2022 and expand 23bp to 1.73% in 2023. We forecast earnings growth of 7.4% in 2023 and 10.3% in 2024.
· We raised our 2022 net profit forecast for by 1% primarily due to the better-than-expected 1Q22 financial performance. We trimmed our 2023 net profit forecast by 1% after adjusting credit costs slightly higher by 2bp to 22bp.
VALUATION/RECOMMENDATION
· Maintain BUY. Our target price of S$37.25 is based on 1.64x 2023F P/B, derived from Gordon Growth model (ROE: 12.5%, COE: 8.25%, Growth: 1.5%).