Review

• DBS reported stronger FY23 results, with net profit climbing 22.8% YoY to S$10,062mn underpinned by higher operating income. ROE rose to 18.0% from 15% in FY22. Despite that, DBS’s results came within our expectations, accounting for 97% of our full-year forecast.

• Sequentially, DBS reported a 15.3% decline in net profit due to lower income from Treasury Markets (TM), along with higher operating expenses.

• A higher interim dividend of 54 cents per share (4Q22: 42 cents per share) was declared. Altogether, total dividends for FY23 will amount to S$1.92 per share vs S$1.50 per share in FY22.

• FY23 total income rose to a record S$20,162mn (+22.2% YoY), underpinned by a 25% and 17% YoY rise in the net interest income (NII) and other non-interest income (non-NII). By segment, the commercial book reported total income growth of 27% due to higher net interest margin (NIM), a rebound in fees and more robust treasury customer sales. FY23 fee and commission income broadened by 9% on the back of higher loanrelated and card fees. Fee income from wealth management also strengthened by 13% YoY. Transaction services continued to mute the overall improvement in fee income.

• Group NIM slipped by 6 bps QoQ to 2.13%. Compared to 1.75% in FY22, NIM expanded by 40 bps to 2.15% in FY23. Meanwhile, loan growth was stable QoQ, but improved by some 1% YoY (in constant-currency terms) due to consolidation with Citi Taiwan. Sequentially, 4Q loans were largely stable due to higher trade and consumer loans. Nevertheless, non-trade corporate loans remained lacklustre.

• Elsewhere, total deposits broadened by 0.7% QoQ and 1.7% YoY. FDs registered a 16.3% YoY, with the expansion partly due to Citi Taiwan. QoQ, FD balances were of little changed. Meanwhile, CASA balances have also stabilised QoQ at around S$280bn, after declining from S$318bn a year ago. The CASA ratio stood at 48% in December 2023.

• FY23 overhead expenses broadened by 16.9% YoY to S$8,291mn from S$7,090mn a year ago. The increase was underpinned by 1) higher staff expenses (+15% YoY), revenue-related expenses (+27% YoY) and 3) other expenses (+21% YoY). Management noted that some of the expense growth was driven by Citi Taiwan and non-recurring technology costs. Meanwhile, underlying expenses only rose by 10%, with the underlying FY23 cost-toincome (CTI) ratio improving to 39% from 43% in FY22.

• Total allowances broadened to S$590mn in FY23, driven by GP set aside amounting to S$78mn and specific allowances, which also ballooned to S$513mn from S$332mn a year ago, partly attributed to exposures linked to a recent money laundering case in Singapore taken in the 3Q. With that, the net credit charge widened to 11 bps (FY22: 8 bps). Meanwhile, total NPAs improved slightly to S$5,056mn in FY23 vs S$5,125mn in FY22 due to the lower formation of new NPAs. The headline non-performing loans (NPL) ratio was stable at 1.1%. Total allowance reserves widened to 128% (FY22: 122%).

• DBS’ Core Equity Tier 1 (CET1) ratio remained well above regulatory requirements at 14.6% (December 2022: 14.6%). 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 144% and 118%, respectively.

Impact

• Incorporating FY23 results, we adjusted our FY24 and FY25 net profit forecasts to S$9,886mn and S$10,345mn from S$9,954mn and S$10,099mn, respectively. We forecast FY26 net profit to rise by 4.6% YoY to S$10,820mn.

Outlook

• DBS’ FY23 financial performance reached new heights, with total income, net profit, and ROE achieving record levels. The franchise and digital transformations implemented over the past decade have proven strategic, yielding substantial benefits for the group despite challenges posed by a higher interest rate environment. 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.

• The company remains steadfast in its commitment to enhancing shareholder value, which is evident through a more intensified capital return as ordinary dividends increase to 192 cents from 150 cents in FY22. A 1-for-10 bonus issue has also been proposed. DBS is looking to increase the pace of capital returns to shareholders, noting that the annualised ordinary dividend going forward will be $2.16 per share over the enlarged share base.

• On the ESG front, DBS announced its inaugural contribution of S$100mn to the community, underscoring its dedication to social responsibility and solidifying its role as a responsible and value-driven organisation.

• Turning to 2024, management acknowledges rising uncertainties from a declining interest rate environment and rising geopolitical tensions. Despite that, net profit is expected to remain relatively stable compared to 2023, as the contributions from stronger fee income momentum will be muted by a high-single-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 higher loan growth will likely offset potential NIM compression.

Valuation

• Incorporating the slight adjustment to our forecast, we revise DBS’s TP to S$35.30 from S$37.90. The TP is derived from an implied PBV of c. 1.57x, based on the Gordon Growth Model. BUY reiterated on DBS.

Source: TA Research - 8 Feb 2024