Holding steady into FY24F
- DBS shared largely positive income guidance for FY24F but we see limited scope in earnings revisions given higher opex and credit cost expectations.
- Excess capital of S$2bn-3bn remains on the books but the release of this into dividends will depend on its digital remedial progress and board decision.
- Reiterate Hold. We remain watchful on asset quality given the elevated interest rates, though its c.6.6% FY23F yield should support its share price.
Positive income growth drivers to sustain net profit yoy in FY24F
DBS thinks that it may be tricky to navigate FY24F given macroeconomic uncertainties but believes that business activity could pick up going forward. To this end, DBS has visibility of a strong pipeline of loans, but (continued) customer repayments given the elevated rate environment could offset the overall full-year loan growth figure. Guidance for NII, fees and non-II is positive (stable or higher yoy growth) but expectations of a more normalised credit cost (c.17-20bp in FY24F vs. c.10-15bp in FY23F) could keep net profit rather flattish (management believes over the c.S$10bn mark) yoy in FY24F. An earlier- or sharper-than expected cut in Fed rates is a key downside risk to earnings, in our view.
DBS expects stable NII in FY24F as NIMs and loan growth rebalance
DBS thinks that NIMs likely peaked in 3Q23 (c.2.19%), and expects an average c.2.16% for full-year FY23F. We highlight that this implies NIMs trending lower to c.2.15-2.18% in 4Q23F. Taking into account the trade-off between NIMs and loan growth (e.g. higher margins at the expense of growth and vice versa) as well as its expectations of Fed rate cuts only in 2H24F (and no hikes until then), NII could stay broadly stable yoy in FY24F. We expect NIMs to then trend lower towards c.2.12% in FY24F. To sustain its margins, DBS has c.S$105bn of loans that have yet to be repriced upwards. Of these loans, c.S$10bn/S$40bn is to be repriced in 4Q23F/FY24F with a c.2%-pt margin uplift.
Being prudent – credit costs should normalise upwards in FY24F
Although DBS is not seeing delinquencies come through, it is baking in some prudence in its credit cost outlook give the macroeconomic uncertainties. Of c.S$215m in allowances in 3Q23, c.S$100m was related to the anti-money-laundering saga in Singapore. DBS does not expect more allowances to come from this portfolio. There is some stress in the commercial real estate (CRE) sector in HK but DBS said it is not seeing major weaknesses in its book given the profile of its counterparties which largely comprise large developers.
Reiterate Hold with unchanged GGM-based TP of S$35.30
DBS reiterated its priority to overcome its digital deficiencies and improve its recovery mechanisms. We reiterate our Hold call on DBS as we believe its valuation of 1.5x CY23F P/BV (1 s.d. above 10-year mean) has priced in flattish earnings growth over the next two years. Upside risks include stronger treasury income. Downside risks include deterioration in asset quality.