CFA Society Singapore
SINGAPORE (Aug 20): Banking stocks are typically a favourite dividend play of investors who hunt for yield. This is because as banks grow, they tend to reward shareholders with a steady payout that usually increases gradually.
At its recent results briefing for 1HFY2018 ended June 30, DBS Group Holdings proposed to pay its biggest first-half dividend of 60 cents a share. At 53.9%, this is the highest dividend payout ratio among the local banks, compared with 36% for Oversea-Chinese Banking Corp (OCBC) and 41% for United Overseas Bank (UOB), and is nearly double the 33 cents a share it paid out a year ago. Based on its Aug 14 closing price of $25.26, DBS has a 12-month trailing dividend yield of 6.7%.
DBS’s generous payout comes as the country’s largest lender by asset size posted a positive set of results for the half-year period — albeit below consensus expectations. Its performance was underpinned by broad-based growth in loans and fee income, as well as higher net interest margin (NIM).
By business units, income grew fastest at consumer banking and wealth management (CBG/WM), which was up 20% y-o-y to $2.76 billion. Growth was evident across loans and deposits, investment products and cards. DBS’s WM assets under management, which include its Treasures and private banking clients, expanded 23% y-o-y to $216 billion. Its share of the domestic housing loan market and SGD CASA (current account savings account) stood at 31% and 52%, respectively.
At institutional banking (IBG), income grew 6% y-o-y to $2.78 billion. This was driven by cash management, which surged 47% y-o-y to $746 million on the back of higher deposit volumes and NIM. However, income from IBG loans and trade fell 6% y-o-y and 2% y-o-y to $1.29 billion and $360 million, respectively.
Finally, the bank’s trading-related income for treasury markets fell 20% y-o-y to $356 million. The brunt of the decline occurred during the second quarter, as a flatter yield curve and wider credit spreads created trading headwinds. In addition, the strong equity market contributions in the first quarter were not repeated.
Overall, DBS’s total income rose 13% y-o-y to $6.56 billion and earnings increased 23% y-o-y to $2.89 billion. Earnings per share (EPS) excluding one-time items improved to $2.25 from $1.83 a year ago. “It’s fair to say this wasn’t our greatest quarter, but it wasn’t bad either. And on balance, given everything, I’ll take it… because the overall underlying business momentum has been strong,” said DBS CEO Piyush Gupta at the results briefing on Aug 2.
Solid balance sheet
If DBS’s higher 1H dividend is approved by shareholders, this will obviously require a bigger cash outlay. Fortunately, the bank has a solid balance sheet so far.
As at June 30, DBS had a Common Equity Tier-1 ratio of 13.6%. This is down from 14.4% a year ago, owing to a dividend payout of $2.8 billion made in May. Last year, the bank declared a 1H dividend of 33 cents a share and a final dividend of 60 cents a share. It also recommended a special dividend of 50 cents a share. The lower CET1 ratio, however, should not prevent DBS from paying a higher dividend, as it is still well-above the regulatory minimum of 3%.
When asked about the balance between maintaining a minimum CET1 ratio and growing dividends, Gupta said: “I don’t have a formula for it. It is judgmental. We have gone from 60 cents to $1.20; there’s no reason to increase it again for the coming year. I want the dividend to be sustainable. We’ll keep growing the dividend over time while keeping to a range of capital we think is appropriate.”
Although DBS has not guided for a minimum CET1 ratio, it is unlikely to diverge from those of OCBC and UOB. OCBC is comfortable with 12.5% to 13.5% and UOB plans to maintain a minimum CET1 of 13.5%.
DBS’s downside risk from non-performing loans has also been reduced. Its NPL balance has dropped 1.2% q-o-q, while the NPL ratio has improved six basis points q-o-q to 1.56%. Its provisions declined 36% q-o-q to $105 million as the bank benefited from a write-back of $65 million for exposure to an oil and gas support services company. “We believe this is related to the sale of heavy lift and construction vessel Lewek Constellation to Saipem for US$275 million,” UOB KayHian analyst Jonathan Koh writes in an Aug 3 report.
Balance sheet aside, DBS has other things going for it. For one, the bank’s NIM is expected to go up on the back of rising US interest rates, which should contribute to net interest income growth. At the briefing, Gupta guided for NIM to widen to between 1.86% and 1.87%, from the previous guidance of 1.85%. It was 1.84% in 1H. Analysts are equally sanguine over the prospects of a higher NIM. In an Aug 2 report, Goldman Sachs says its NIM forecast is within DBS’s guidance. RHB Research Institute Singapore is more optimistic, forecasting NIM to be 1.87% and 1.95% in 2018 and 2019, respectively.
The bank is also prudent at managing its costs. Cost-to-income ratio improved to 42.9% in 1HFY2018 from 43.3% a year ago, though it worsened to 44.3% in 2QFY2018 from 43.4% in the same quarter last year. DBS has guided that it will reflect a CIR of 43% for this year and below 40% in the longer term, as it hopes to shave off 50bps from CIR for each year ahead. Investments in technology will continue to lower CIR, according to Jefferies.
Trade war and property cooling measure risks
Still, dark clouds are emerging on the horizon. DBS’s loan growth is expected to decelerate ahead due to headwinds from the latest round of property cooling measures implemented in July. First-time buyers’ demand will be offset by investors deterred from getting their second, or third, properties, given the hefty additional tax that they now need to pay.
“[We] originally expected to add $4 billion this year. Based on what happened with past tightening measures, we’d probably give up about half a billion dollars of the expected growth and come in at $3.5 billion instead of $4 billion. In addition, large Singapore developers could slow down their rebuilding of land banks. Altogether, we could see a shortfall of about $1 billion of loan growth from the property measures,” said Gupta.
Analysts agree. “Loan growth… is set to see some weakness, given the impact from Singapore’s new property cooling measures and as DBS stays away from low-yielding trade loans,” say Goldman Sachs analysts Melissa Kuang, Vincent Lim and Max Jelatianranat.
The trade war between the US and China has also cast concern over DBS, which has significant operations in Hong Kong. Although the bank’s analysis suggests the impact from the trade tariffs on economic fundamentals is “benign” so far, it has a negative impact on market confidence. As a result, its treasury markets business was hit.
“The spillover effect really winds down to a confidence issue. It’s a market psychology issue more than what really happened to the underlying economy,” said Gupta, noting this affects yield curves and credit spreads. “This is hard to call in the next few quarters.”
Given these headwinds, CGS-CIMB Research analyst Lim Siew Khee has downgraded DBS to a “hold” rating from “add” previously and lowered her price target to $28 from $34. She has also lowered her loan growth forecast to between 6% and 7% in FY2018 from 8% previously, despite higher NIM of one to two basis points. As a result, Lim has cut her EPS forecast for FY2018 to FY2020 by 0.8% to 6% to reflect the 2QFY2018 results.
Deutsche Bank Research has a “hold” rating with a price target of $30. “We expect that the Hong Kong market could face more challenges in the near term, affected by capital market weakness from trade tension between China and the US, and renminbi currency weakness may lead to slower system growth. The slower system deposit growth year to date may lead to more intensive deposit competition, faster rotation into time deposit funding,” Deutsche analyst Franco Lam writes in an Aug 2 report.