2Q22F: Normalising credit costs
- We expect the stronger NIM expansion of c.10bp qoq in 2Q22F to offset the weakness in fees (weighed down by risk-off sentiment in wealth mgmt).
- Trading income likely held steady, but investment gains were a drag. 2Q22F credit costs likely normalised towards c.15-20bp run-rate (vs. 5bp in 1Q22).
- Focus will be on management outlook (growth, asset quality risks) in 2H22F.
- Reiterate Add with S$40.20 GGM-based TP. More pronounced NIM expansion is a key re-rating catalyst. DBS trades at 1.3x FY22F P/BV.
Continued risk-off may affect wealth mgmt. but NIM a bright spot
As a sector, Singapore bank valuations have been weighed down by macroeconomic headwinds of persistent inflation, US Fed fund rate uncertainties, and recession risks. As such, we expect DBS’s 2Q22F earnings to be affected by softer wealth management income given the continued risk-off sentiment amid market volatility, lower investment gains as interest rates rise, and (upwards) normalisation of credit costs. Nonetheless, we expect more significant NIM expansion to offset some of the weakness. Other fee income lines such as credit cards should hold up well as travel spending rebounds. Steady trading income from stronger customer flows could help as well, in our view.
Credit costs may normalise towards c.15-20bp run rate (1Q22: 5bp)
We expect management’s guidance on economic growth (on whether a contraction is likely) and correspondingly on asset quality in 2H22F to be a key focus in its 2Q22 results briefing. We understand that portfolio stress tests are benign at this juncture but DBS remains cautious in its provisioning stance. DBS’s 2Q22F credit costs likely normalised towards its c.15-20bp run rate (1Q22: 5bp) as it held on to its mgmt. overlays (c.S$1.5bn) as a buffer. We understand that impairments could come up to c.S$100m if DBS were to reverse these overlays. On the ground, although there have been some concerns on borrower repayment capabilities as fixed (for c.2-3 years) mortgage rates have risen to c.3% in Jun (from c.1.5% in Jan), the bank’s c.50% loan-to-value (LTV) ratio for its Singapore mortgage portfolio provides comfort. DBS has not highlighted any stresses for this portfolio. Materially higher credit costs given a recession is a key downside risk.
NIM expansion could cushion macro weakness
We expect DBS to record net profit of c.S$1.73bn for 2Q22F (-4% qoq, +1% yoy). We expect c.1.5% loan growth in 2Q22F, mainly driven by corporate demand. On NIM, we project a larger c.10bp qoq expansion to 1.56% in 2Q22F (1Q22: +3bp qoq) and anticipate the rise to be more pronounced in 3Q22F given the lagged pass-through of the 50bp/75bp Fed rate hikes in May/Jun 22, which may cushion the risks of higher impairments to come, if any. An analysis factoring in Fed rate hike expectations (Bloomberg consensus forecasts) would result in FY22F/23F NIMs of c.1.7%/2.1% (our current expectation: 1.6%/1.9%). Incorporating credit cost of 15bp in FY22F/23F (our current forecast: 2bp/10bp) would still
raise our FY22F/23F EPS by c.2%/14%. Given these factors, we project that DBS’s yoy net profit growth would come up to +33%/+14% in FY22F/23F – stronger than peers.