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DBS on track to hit $10 billion target but challenges lie ahead, especially from geopolitics

Goola Warden
Goola Warden • 9 min read
DBS on track to hit $10 billion target but challenges lie ahead, especially from geopolitics
For the nine months ended September, DBS recorded a net profit of $7.89 billion, putting the bank just $2.11 billion short of $10 billion. Photo Credit: Bloomberg
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As DBS Group Holdings reports earnings for 3QFY2023 ended September and moves towards a net profit of higher than $10 billion for FY2023, group CEO Piyush Gupta sounds a cautionary note. The challenges are many and mainly geopolitical, he says, and two wars and their impact on oil prices are of primary concern to Asean.

As BMI, a Fitch Solutions company notes, oil prices are torn between rising conflict-related risks on the supply side and a slowing global economy, which will increase the downside pressures on demand. Oil prices are now artificially high because of production cuts by Saudi Arabia and Russia.

“In our case, direct exposure is limited to bank facilities to UAE and Qatari banks,” Gupta says. If the Middle East war — the other being Russia’s invasion of Ukraine — remains contained, Gupta reckons there will not be too much of a spillover.

“If this has the potential to become a larger regional escalation and if you see oil price getting up to US$150 [per barrel], for example, most of the countries in this region will start having challenges with the trade deficit account as well as some currency volatility,” Gupta reckons. That would result in a further slowdown.

The analysts at BMI expects the fighting to remain contained in the Gaza Strip in which there is no oil-producing infrastructure. However, the other wild card is if the US decides to “choke off illicit exports of Iranian crude in response to Tehran’s alleged involvement in the Hamas attack on Oct 7,” the analysts say. “Until some kind of a resolution is found, a risk premium will linger in the price, buoying the market and helping partially offset more bearish dynamics [for oil] on the macro side.”

Net profit to be maintained

See also: OCBC expands programme to equip another 10,000 elderly with digital banking skills and scam prevention awareness

Still, DBS is expected to maintain FY2023’s record performance in FY2024. During a results briefing on Nov 6, Gupta guided that DBS will be able to attain an ROE “north of 17%”. Profit before allowances in FY2024 is likely to be higher than in FY2023 while net profit is likely to be maintained at FY2023’s level.

For the nine months ended September, DBS recorded a net profit of $7.89 billion, putting the bank just $2.11 billion short of $10 billion. In 3QFY2023, net profit rose 16% y-o-y but fell by 2% q-o-q to $2.633 billion. This was before a one-time charge of $40 million for the consolidation of Citi Taiwan, which is unlikely to be repeated. Analysts have also adjusted their net profit forecasts for this year and next, with a net profit of $10.18 billion for this year and $10.11 billion for next year.

Total income rose 16% y-o-y and 3% q-o-q to $5.2 billion in 3QFY2023. Expenses were up 12% y-o-y, indicating a positive jaws ratio which compares income growth to cost growth. Historically, DBS has reported positive jaws. The issue now is whether this can be maintained in FY2024.

See also: OCBC launches accelerated banking career programme for 500 polytechnic students over next three years

During the briefing, group CFO Chng Sok Hui said for the nine months ended September, expenses grew 14% “due to higher staff costs”. Next year, income is likely to rise by low-to mid-single digits while costs could rise by mid-to high-single digits. Higher staff costs along with higher technology costs following the interruptions in DBS’s digital offerings during the year have necessitated DBS to look at its digital stack. DBS is also taking on talent to help tackle the problem.

On Nov 1, DBS announced that Ho Twee Teng, a 40-year DBS technology veteran, was appointed as the bank’s new head of enterprise architecture site reliability engineering (EASRE) from Oct 18. DBS has also created a new Quality Assurance function in EASRE to provide an extra independent layer of verification, controls and checks over the bank’s change management process.

“The DBS board and management today apologised for the series of digital disruptions this year and said the bank is addressing the issues at hand with utmost priority. This includes the rollout of a comprehensive roadmap to improve technology resiliency, encompassing both immediate and longer-term measures to strengthen technology governance, people/leadership, systems and processes,” DBS said in a Nov 1 announcement. The bank also assured customers that when the roadmap is completed, they will see improved service reliability.

Peak NIM

Meanwhile, other challenges are emerging for DBS. For one, net interest margins or NIM, probably peaked in 3QFY2023, according to Gupta. Although NIM expanded by 29 bps y-o-y and 3 bps q-o-q to 2.19% in 3QFY2023, it averaged 2.16% for the nine months. The outlook is for NIMs to ease by around 3 bps in FY2024 from 2.16%.

As it is, the high cost of bank loans has caused some better names to repay loans, while other businesses are looking at alternative ways of raising funds other than via bank debt.

Additionally, it is increasingly clear that there is a mortgage war going on in Singapore. Housing loans are among the local banks’ largest sectors with all three devoting around a fifth of the loan book to residential mortgages. Among them, DBS has the lowest portion of housing loans as a portion of total loans at 19.1%, followed by Oversea-Chinese Banking Corp (OCBC) at 21.2%, and United Overseas Bank U11 -

(UOB) at 23.7%.

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“For mortgages, our through-the-door pricing for the quarter was about 3.3% and it has been creeping down as well, so there is some pressure on NIMs because of the new mortgage bookings,” says Gupta. “When [borrowing] rates are so high, anyone who can access money either through equity or cash flow are also paying down their loans. When you’re borrowing at 6%, the quicker you can repay, the better.”

Indeed, according to anecdotal evidence, mortgages for big-ticket properties are going at 3%, with DBS’s peers providing those loans. DBS still has $105 billion of loans to reprice at higher levels. Of these, $10 billion are being repriced this year and $40 billion next year. Loans getting repriced are priced at near 2% margins (above the Singapore overnight rate average or Sora), Gupta indicates. “The loans that are getting repriced are still getting close to 2% margins. This is one of the tailwinds that protect our NIMs. Because so much of the loans are priced at a very low base, we still get the lift,” he says.

Analysts are forecasting NIMs in the range of 2.15%–2.2%. The Citi portfolio is likely to add 3 bps to NIM but the prospect of rate cuts in 2H2024 was raised if geopolitical tensions and economic prospects worsen.

Despite robust loan pipelines, Gupta indicates that customers may continue to pay down. “Net net, focused on loan growth right now, the underlying business forecasts are for 5%– 6%. But at the top-down view, I feel that we might wind up with only 2% loan growth,” Gupta says.

One of the reasons NIM growth, if at all, is likely to be modest is because both Chng and Gupta have acknowledged that there is some migration from cheap casa (current account savings account) to higher-cost fixed deposits. As at end September, Singapore-dollar Casa fell by around $15 billion q-o-q, and $73 billion y-o-y to $277 billion. Back in 3QFY2022, Casa comprised 65.6% of deposits compared to 52.1% in 3QFY2023.

“Casa outflow is expected at $45 billion this year and half of that in FY2024, especially as loan demand remains soft,” Citi cautions in a report after DBS’s 3QFY2023 results.

Asset quality remains stable

Non-performing loans (NPL) inched higher by 6% q-o-q due to the integration of Citi Taiwan, taking the NPL ratio to 1.2% from 1.1% in 2QFY2023. DBS has recognised specific provisions (SP) of $197 million in 3QFY2023. Of this, around $100 million is due to Singapore’s largest money-laundering case. Most of the money-laundering exposure is likely to be through mortgage financing. During the investigation and due process of the law, zero value is likely to be assigned to these mortgages, which is driving SPs, analysts reckon.

In 2HFY2023, OCBC had SPs for its exposure to commercial real estate (CRE) overseas. “We don’t have a big book in CRE in the West. In our macro modelling overlay this quarter, we added some more overlay for the potential of CRE in the US and we are well covered,” Gupta says.

DBS’s total allowance coverage is 125% and the bank has management overlays of around $2.2 billion according to Chng. These overlays are over and above what regulators require banks to provide for in their expected credit loss (ECL) models 1 and 2.

Analysts have indicated that DBS Hong Kong’s overall provision coverage is at 105%. Overall CRE exposure in Hong Kong is $19 billion of which $3 billion is to office; $3 billion to retail, mainly through major REITs; and the balance of $13 billion is mixed-use through larger corporations. The loan- to-value for Hong Kong CRE is at 50% which should provide a cushion for a drop in collateral values.

OCBC favoured based on P/B

Our price-to-book (P/B) ratio charts show that OCBC is now trading at 1 standard deviation above its five-year mean, implying it is expensive as investors prefer it to the other two banks. OCBC will announce its 3QFY2023 results on Nov 10. Investors and analysts are expecting more information on OCBC’s capital management. It has already raised its dividend payout ratio to 50% but some market observers are hopeful of a special dividend.

UOB is the cheapest bank stock based on this metric. UOB is trading below its five-year mean and is the cheapest bank in absolute and relative valuation terms.

DBS is also trading above its five-year mean but with a slightly cheaper valuation compared to OCBC. However, prospects of a special dividend from DBS may be delayed. “Management estimated surplus capital at $3 billion or $1.20 per share based on the operating range for CET-1 CAR of 12.5%–13.5% and will conduct a review. The surplus capital could be returned to shareholders assuming there is no escalation in the Middle East conflict,” UOB KayHian says in an update.

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