Review

• DBS reported 3Q23 net profit, which climbed by 17.8% YoY to S$2,633mn. QoQ, however, net profit fell by 2% due to lower income from Treasury Markets (TM), along with higher expenses and allowances. 9M23 net profit grew by 34.9% to S$7,893mn, underpinned by higher operating income. ROE rose to 18.6%. With that, DBS’s results exceeded our expectations, accounting for 81% of our full-year forecast. A higher interim dividend of 48 cents per share (3Q22: 36 cents per share) was declared.

• 9M23 total income rose to a record S$15,173mn (+27% YoY), underpinned by a 33% and 34% YoY rise in the net interest income (NII) and other noninterest income (non-NII). By segment, the commercial book reported total income growth of 33% due to higher net interest margin (NIM) and broadbased non-interest income growth, while Treasury Markets trading income declined by 37% due to higher funding costs. Elsewhere, 9M23 fee and commission income broadened on the back of higher loan-related and card fees. Fee income from wealth management also improved QoQ and YoY. Only transaction services muted the overall improvement in fee income.

• Group NIM continued to rise 3 bps QoQ to 2.19%. Compared to 1.65% in 9M22, NIM expanded by 51 bps to 2.16% in 9M23. Meanwhile, loan growth remained weak, although total advances widened by 1% QoQ (in constantcurrency terms) due to consolidation with Citi Taiwan, which contributed to some S$10bn. Trade loans declined as exposures were not replaced due to general market slowdown and unattractive pricing.

• Consumer loans and non-trade corporate loans were also lower YoY, the latter resulting from higher repayments. Elsewhere, total deposits also slipped by 1.6% QoQ and 1.4% YoY. FDs registered a 2% QoQ expansion due to Citi Taiwan. Meanwhile, CASA balances stayed on a downtrend, declining to S$277bn from S$292bn in June 2023 and S$350bn a year ago. The CASA ratio stood at 48% from 60% in September 2022.

• 9M23 overhead expenses broadened by 14.1% YoY to S$5,851mn from S$5,127mn a year ago. The increase was underpinned by 1) higher staff expenses (+16.3% YoY) and 2) other expenses (+10.5% YoY). Despite the rise in expenses, DBS’s 9M23 cost-to-income (CTI) ratio improved YoY to 39% from 43% in 9M22 due to positive JAWs.

• Total allowances broadened to S$448mn in 9M23, driven by GP set aside amounting to S$75mn and specific allowances, which also ballooned to S$374mn from S$260mn a year ago for exposures linked to a recent money laundering case in Singapore. With that, the net credit charge widened to 11 bps (9M22: 8 bps). Nevertheless, total NPAs improved to S$5,303mn in 9M23 vs S$5,600mn in 9M22 due to the lower formation of new NPAs. The headline non-performing loans (NPL) ratio was stable at 1.2%.

• DBS’ Core Equity Tier 1 (CET1) ratio remained well above regulatory requirements at 14.1% (September 2022: 13.8%). Management noted that the balance sheet is solid, with ample capital, liquidity, and general allowance reserves. Elsewhere, DBS reported a Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) at 138% and 117%, respectively.

Impact

• We tweaked our NIM assumptions to align with the better 3Q performance. However, we also raised the credit cost assumption for FY24/25 to 18 bps, in line with fresh management's guidance for FY24. With that, we tweaked our FY23/24/25 net profit forecasts to S$10,407/9,954/10,100mn from S$9,707/10,216/10,798mn. 

Outlook

• DBS has reported a substantial 16% YoY income growth, reaching a record S$5.19bn in 3Q23. This achievement is attributed to a consistent increase in the NIM over the past seven quarters and a sustained recovery in fee income. However, some notable challenges faced include sluggish loan growth due to unattractive trade loan pricing and higher repayments for non-trade loans.

• On a positive note, the integration with Citi Taiwan has proven to be accretive to earnings and ROE. The consolidation of Citi Taiwan has bolstered DBS's portfolio with an additional S$10bn in loans, S$12bn in deposits, and increased fee income from credit cards and wealth management.

• Turning to 2024, management acknowledges rising uncertainties stemming from a potential macroeconomic slowdown and geopolitical risks. Net profit is expected to remain relatively stable compared to 2023, as the contributions from stronger fee income momentum will be muted by a highsingle-digit increase in expenses and a normalised credit charge-off rate of 17-20 bps. We foresee DBS allocating more resources to address digital disruptions, focusing on enhancing service availability and expediting service recovery. Additionally, NII is projected to remain steady YoY, as a potential NIM compression is likely to be offset by higher loan growth.

Valuation

• We raised the market risk premium assumption for the sector to 5.5% from 5.0% due to the rising macro uncertainties impeding growth prospects in the near term. With that, DBS’s TP is adjusted to S$37.90 from S$39.20. The TP is derived from an implied PBV of c. 1.53x, based on the Gordon Growth Model. BUY reiterated on DBS.

Source: TA Research - 7 Nov 2023