2Q22: Higher NIM And Lower CIR Pushing ROE Higher
DBS registered massive NIM expansion of 12bp qoq to 1.58% in 2Q22. NIM has already exceeded 1.80% in July and would reach 2.00% within 2H22. Management also sees CIR falling towards 40% by end-22. The combination of higher NIM and lower CIR would push ROE towards 15.5-16.0% in 2023. Management would review its dividend policy at end-22 with a view of hiking DPS in 2023. DBS provides dividend yield of 4.4%/5.2% for 2022/23. Maintain BUY. Target price: S$43.60.
RESULTS
• DBS Group Holdings (DBS) reported net profit of S$1,815m for 2Q22, up 6% yoy and 2% qoq. The results were above our net profit forecast of S$1,614m.
• Moderate loan growth. Loan growth was 7% yoy and 2% qoq in 2Q22 driven by non-trade corporate loans in Singapore and Hong Kong and trade loans amid higher commodity prices. By geographical region, loan growth was driven by Singapore (+6.9% yoy), Hong Kong (+13.0% yoy) and China (+8.4% yoy).
• Higher CASA ratio enhances sensitivity to rising interest rates. NIM expanded by a sizeable 12bp qoq to 1.58%. The sizeable NIM expansion was due to: a) the hike in US Fed Funds Rate having strong pass-through to domestic interest rates with SORA and three month SIBOR rising 105bp and 112bp qoq respectively to 1.66% and 1.91%, and b) DBS’ CASA ratio improving 13.6ppt to 72.3% over the past three years.
• Drag from wealth management. Fees & commissions dropped 12% yoy in 2Q22. Contribution from wealth management declined 21% yoy due to lower investment products sales. On the other hand, fee income from loans-related activities, transaction services and cards grew 3%, 4% and 23% yoy respectively.
• Lower non-interest income. Other non-interest income dropped 10% yoy in 2Q22 due to lesser gains from investment securities with less favourable market conditions.
• Asset quality was stable. NPL ratio was unchanged at 1.3% in 2Q22. New NPL formation moderated to S$271m, lower than S$465m in 1Q22. Total provisions were muted at S$46m. There was a small write-back in general provisions of S$23m due to repayments and transfers to NPLs.
• The board has proposed interim dividend of 36 S cents for 2Q22 (2Q21: 33 S cents).
STOCK IMPACT
• Rapid NIM expansion to continue in 2H22. DBS sees US Fed Funds Rate peaking at 3.5- 4.0%. Management reiterated sensitivity of net interest income at an increase of S$18m20m for every increase in US Fed Funds Rate of one basis point. The bank disclosed that NIM has already exceeded 1.80% in July, which means that NIM expansion would be at least 22bp in 3Q22. Management indicated that NIM would reach 2.00% between 3Q22 and 4Q22.
• Higher ROE powered by NIM expansion and lower CIR. Management guided loan growth at mid-single-digit on a full-year basis for 2022. Fee income is likely to have bottomed and the reopening provides some tailwinds for recovery in 2H22. On a full-year basis, fees are expected to be lower than 2021 due to lacklustre contribution in 1H22. DBS expects cost-to-income ratio (CIR) to be lowered to 40% by end-22 and fall below 40% in 2023. CIR below 40% is expected to be achievable and sustainable. Management sees ROE exceeding 14% in 2022 and hitting 15.5-16.0% in 2023.
• Sufficient general provisions to cushion against external uncertainties. DBS has set aside management overlays of S$1.8b. Management does not intend to add to the buffer, which already provides a substantial cushion. Its total general provisions of S$3,737m represent 87bp of gross loans. Credit costs are expected to be in the high teens in 2H22, which translates to credit costs of 10-11bp on a full-year basis for 2022. Management expects credit costs to normalise higher to 18-20bp in 2023.
• Exposure to Mainland China. DBS has exposure of S$2b onshore to the real estate sector in Mainland China (0.5% of total loans). They involve half a dozen companies, mainly SOEs and network customers. DBS also has exposure to S-REITs investing in China. Its exposure to privately owned enterprises (POE) is considered small. SOEs are unaffected and are able to raise cash in the domestic bond market. However, some POEs are having difficulties refinancing their borrowings and are a source of systemic risks.
• Acquisition of Citi Consumer Taiwan. Management expects the completion of the acquisition and full integration of Citi Consumer Taiwan by 3Q23. The acquisition is expected to add S$800m to top-line and S$250m to bottom line.
• Dividend policy under review. Current CET-1 CAR of 14.2% is above DBS’ comfortable operating range of 12.5-13.5%. The implementation of Basel IV starting 1 Jan 23 is advantageous and would further increase DBS’ CET-1 CAR. Thus, management would review its dividend policy at end-22 with a view of hiking DPS in 2023.
EARNINGS REVISION/RISK
• We raised our earnings forecast by 13% for 2022 and 15% for 2023 due to the strong 2Q22 results and DBS’ high sensitivity to rising interest rates.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$43.60 is based on 1.86x 2023F P/B, derived from the Gordon Growth Model (ROE: 15.4%, COE: 8.5%, growth: 0.5%).