3Q23: Resilient NIM And Net Profit; Pondering Capital Management
DBS’ 3Q23 net profit of S$2,593m (+16% yoy) was slightly above expectations. NIM expanded 29bp yoy and 3bp qoq, while net interest income grew 16% yoy. Other non-interest income expanded by a robust 21% yoy to S$845m. Quarterly DPS was maintained at 48 S cents. Management expects ROE to maintain above 17% in 2024. DBS will consider capital management by potentially returning surplus capital of S$3b or S$1.20 per share to shareholders. Maintain BUY. Target price: S$44.28.
RESULTS
• DBS Group Holdings (DBS) reported net profit of S$2,593m for 3Q23, up 16% yoy but down 1% qoq. The results were slightly above our net profit forecast of S$2,532m despite incurring one-time integration costs of S$40m for Citibank Taiwan.
• Continued NIM expansion. NIM expanded by 29bp yoy and 3bp qoq to 2.19% in 3Q23. NIM expansion was toned down by the outflow of CASA in Singapore and lower HIBOR in Hong Kong. Net interest income grew 16% yoy.
• Loans contracted 2% yoy. Loans grew 1% qoq on a constant-currency basis in 3Q23. Corporate loans contracted 1% qoq due to higher prepayments. Trade loans contracted 3% qoq due to unattractive pricing. Citibank Taiwan contributed loans of S$10b.
• Broad-based growth in fee income. Fees & commissions grew 9% yoy in 3Q23. The recovery was led by wealth management (+22% yoy), cards (+21% yoy) and loans-related fees (+12% yoy). DBS attracted net new money of S$5b.
• Treasury income driven by customer flows. Other non-interest income expanded by a robust 21% yoy to S$845m in 3Q23 due to higher treasury customer sales.
• Maintaining cost efficiency. Operating expenses increased 12% yoy in 3Q23 due to higher staff costs (+13% yoy) and the integration of Citibank Taiwan. Underlying operating expenses, excluding Citibank Taiwan, increased by 10% yoy. Cost-to-income ratio is healthy at 39.3% and remains below the 40% mark.
• Asset quality was stable. NPLs jumped 6% qoq in 3Q23 due to the integration of Citibank Taiwan. NPL ratio inched marginally higher by 0.1ppt to 1.2%. DBS has prudently recognised specific provisions of S$192m (3Q22: S$25m) due to exposures linked to the recent money laundering case in Singapore. It has provided financing to the accused for the purchase of real estate and has fully provided for the exposure.
• Expansion in Taiwan. DBS consolidated Citigroup’s consumer banking business in Taiwan on 12 Aug 23. It has become the largest foreign bank in Taiwan by assets. The acquisition added loans of S$10b and deposits of S$12b. The number of credit card accounts increased five-fold to 3m.
• The Board has maintained quarterly dividend at 48 S cents for 3Q23.
STOCK IMPACT
• Resilient earnings supported by higher-for-longer interest rates. Management has guided for growth in total income at mid single-digits for 2024. NIM is expected to be stable supported by higher-for-longer interest rates. It expects double-digit fee income growth driven by wealth management and cards. Expenses are expected to increase at high single digits. Credit costs are expected to be 17-20bp. Net profit is expected to be maintained at 2023’s level of about S$10b. ROE should be maintained above 17% in 2024.
• Potential capital management. Management estimated surplus capital at S$3b or S$1.20 per share based on operating range for CET-1 CAR of 12.5-13.5% and will conduct a review. The surplus capital could be returned to shareholders assuming there is no escalation in the Middle East conflict.
• Working on delivering improved service availability and quicker recovery. MAS has imposed a six-month pause on DBS for non-essential IT changes (except those related to security, regulatory compliance and risk management) and banned DBS from acquiring new business ventures. DBS will also not be allowed to reduce the size of its branches and ATM networks in Singapore. This restriction will be in force until MAS is satisfied with the progress of DBS’ remediation plan. These restrictions create more urgency for DBS to identify the root cause of the series of digital disruptions. The bank can continue to grow organically. Nevertheless, the pace of its future growth could be restrained if these restrictions are
maintained for a prolonged time period.
EARNINGS REVISION/RISK
• We raised our earnings forecast by 0.6% for 2023 due to good 3Q23 results.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$44.28 is based on 1.80x 2024F P/B, derived from the Gordon Growth Model (ROE: 16.2%, COE: 9.0%, Growth: 0.0%).
