Broker’s Call: DBS Group Q3 Net Profit Hits S$2.24 billion, Guides ROE of Above 15% in FY2023

November 11, 2022

CGS-CIMB Analyst take

Singapore bank stocks have done relatively well in 2022 amid the global market sell-off. That’s been down to rising interest rates and their positive impact on bank profits.

While the CPI number in the US last night came in below expected, the Federal Reserve (Fed) will continue to hike rates (albeit maybe at a slower pace).

With that in mind, how have Singapore’s banks performed in the latest earnings season? Last Thursday (3 November) was the turn of DBS Group Holdings Ltd (SGX: D05) to share its Q3 2022 and 9M 2022 numbers.

The research team at CGS-CIMB Securities maintains our “ADD” call on DBS Group stock although we have slightly trimmed our target price to S$38.75 (from S$40.20 previously).

So, for Singapore’s many bank stock investors out there, here’s what they need to know about DBS Group’s latest quarterly and year-to-date numbers.

DBS Group FY2023 outlook fairly optimistic

As we head into the last quarter of 2022 and on to FY2023, DBS management struck a fairly optimistic tone. It expects net interest margins (NIMs) to reach 2.25% by the middle of 2023.

It then expects it to plateau around this level in the second half of next year (based on a forecasted Fed rates peak of 4.75%).

Management also foresees low double-digit fee income growth that’s driven by a rebound in wealth management (that was down 24% year-on-year for 9M 2022 but now seems to be stabilizing in Q3 2022).

It also foresees the bank maintaining its 40% cost-to-income ratio, or going even lower, in 2023 given strong top line growth and baking in around a 10% operating expenditure increase.

That will come mostly from wage inflation and the integration of Citigroup Inc’s (NYSE: C) consumer franchise in Taiwan – a deal that should be completed in August 2023.

Finally, DBS expects its Return on Equity (ROE) to rise to be comfortably over 15% in FY2023, up from an estimated c.13.5% for FY2022.

Repricing for DBS to continue into FY2024

A Fed funds rate that rises above DBS Group’s base-case peak assumption of 4.75% by mid-2023 could present potential earnings upside.

However, we highlight that the incremental impact of an expansion in NIM won’t be as strong as funding costs catch up to higher yields – an issue faced by all Singapore banks.

In its base case, management guides that net interest income (NII) sensitivity will nearly halve to c.S$10 million per basis point (bp) of Fed funds rate hike.

That’s because DBS’s deposit beta will rise in tandem from c.25 in Q3 2022 to c.45 in mid-2023 (versus the S$18-20 million uplift it was seeing per bp Fed rate hike at lower Fed funds rates).

Nevertheless, there should still be further runway for the repricing of its portfolio.

Its NIM should continue to benefit from the repricing of S$180 billion in fixed rate instruments and fixed-deposit-rate home loans. Of these, a quarter reprice in FY2023 and another quarter reprices in FY2024.

Reiterate Add on DBS shares but trim target price

In DBS management’s own words, the banks assets are “pristine” and it doesn’t see any stresses in its book with net new non-performing asset (NPA) formation easing, while upgrade and recoveries improve.

The bank did, notably, add S$350 million as general provision overlays in Q3 2022 as a buffer against potential macroeconomic uncertainty in the face of Fed rate hikes towards 5%.

Conservatively, DBS expects c.20bp in specific provisions (SPs). We estimate c.15bp credit costs in FY2023 as we factor in potential writebacks offsetting the SPs.

Our Gordon growth model (GGM) derives a target price that is lowered to S$38.75 as we roll over to FY2023 and factor in a higher c.4% risk-free rate.

As with other Singapore banks, the key downside risk for DBS is asset quality deterioration as interest rates rise.

Disclaimer: CGS-CIMB Securities Banks Analyst Andrea Choong doesn’t own shares of any companies mentioned.