DBS Group – Rising risk-on sentiment

Excerpts from CGS International report

DBS Group Holdings (SGX: D05)

• Delayed Fed fund rate cuts (DBS Group expects two in 2H24F) and further asset repricing should support stronger NIMs in FY24F. Loan growth could taper.
• DBS Group guides for FY24F ROE to trend at c.17%. Release of excess capital supports dividend upside (via core/special or M&A), but timing is uncertain.

Reiterate Hold with a higher TP of S$35.90. While its c.6% yield is attractive, we think that sequential earnings growth over FY25-26F may be challenging.

A strong showing in 1Q24; risk-on sentiment is returning

Although geopolitical risks persist, we sensed a more positive tone in the delivery of management’s update on its FY24F outlook. 1Q24 core net profit of S$2.96bn was boosted by strong showings on almost all fronts. Higher wealth management fees was a welcome surprise, as risk-on sentiment improved in 1Q24. Excluding the consolidation of Citi Taiwan, 1Q24 wealth fees rose c.35% qoq. DBS Group highlighted that the strong net new money inflows over FY22-23 (c.S$24bn each year) are starting to be deployed into investment products. 1Q24 net new money inflow was steady at c.S$6bn. According to management, sequential wealth management fee performance would greatly depend on US Fed funds rate newsflow. Treasury income rose to a new high in 1Q24 (+43% qoq. +24% yoy), even after adjustments for a non-recurring c.S$100m gain on forex hedges.

Adding longevity to its NIMs

DBS’s steady NIM of c.2.14% was supported by c.S$16bn of fixed asset repricing in 1Q24 (c.2% uplift in yield). The bank expects another c.S$10bn-12bn of these loans to reprice in 2Q24F, and c.S$12bn-14bn in 2H24F. DBS has been actively increasing the duration of its loans portfolio (bulk of its book is about 2-3 years) to maintain asset yields into FY25-26F and moderate the impact of higher funding costs and impending interest rate cuts. DBS Group now expects two US Fed fund rate cuts in FY24F (Jun/Jul 24, Sep 24) vs. 5 cuts previously, but still expects FY24F NIMs to come just below FY23’s exit-NIM of 2.13%.

Valuation/Recommendation

Reiterate Hold with higher GGM-based TP of S$35.90. We raise our FY24-26F EPS by c.3-5% to factor in stronger non-II and sustained NIMs and raise our GGM-based TP to S$35.90. DBS’s net profit trajectory places it on course for the upper-end of its c.15-17% ROE guidance for the medium term in FY24F. The release of excess capital remained a key discussion point in its earnings briefing. Adjusting for the removal of the Monetary Authority of Singapore’s penalty of a 1.8x multiplier to DBS’s operational risk-weighted assets, its pro-forma CET1 would be a higher 15.6% in 1Q24 (vs.14.7% currently). Put against the upper-end of its optimal CET1 range of 12.5-13.5%, this translates into a potential c.S$3 DPS to be released, though the removal of the penalty, form of shareholder return and timeline of both these actions are uncertain, if at all. Reiterate Hold as we think that sequential earnings growth over FY25-26F may be challenging.

You can find the full report here and the company website here.