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At half-time, DBS clocks net profit of $5.26 bil

Goola Warden and Felicia Tan
Goola Warden and Felicia Tan • 5 min read
At half-time, DBS clocks net profit of $5.26 bil
DBS' net profit gets closer to $10 billion at half time, dividends rises 6 cents a quarter to 48 cents
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If $10 billion was the original target at the start of the year for DBS Group Holdings’ net profit, the local bank is more than halfway there. For investors, net profit growth means higher dividends, because the banks including DBS have payout ratios of around 50%.

On Aug 3, DBS reported a net profit of $2.63 billion for 2QFY2023 to June, up 45% y-o-y and 2% q-o-q. The estimated dividends payable is $1.24 billion, or 48 cents per share. DBS pays dividends quarterly. Its dividend in 1QFY2023 was 42 cents. Annualised, the new dividend will be $1.92, translating into a yield of 5.7%. The new higher dividend translates into an annual increase of 24 cents per share, which is the guidance that DBS has given on dividends.

Despite the write-back and the one-time integration costs for Citigroup Taiwan, DBS would still have made a “run-rate” of more than $2.5 billion to put it within reach of the magical $10 billion target.

Net profit in 1HFY2023 rose to a record of $5.26 billion, up 45% y-o-y. Including one-off items, net profit rose 44% to $5.2 billion. As at June 30, DBS’s cost-to-income ratio declined to 38.2% from 44.5% a year ago. CET1 remained stable at 14.1%, while net book value rose by more than $1 to $21.85.

The growth was underpinned by a continued expansion in net interest income and net interest margins (NIM) in the absence of loan growth. In 1HFY2023, NIM rose to 2.14% compared to 1.52% a year ago.

A quarterly record

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Interestingly, in 2QFY2023, both loans and deposits declined. Loans fell 1% q-o-q and 2% y-o-y due to a decline in low-margin trade loans. For deposits, Casa (current account savings account) deposits fell by 3% or $10 billion q-o-q, significantly lower than the $32 billion q-o-q decline in 3QFY2022.

From the start of the year, DBS has separated its commercial book net interest income from its Treasury Markets income. The commercial book has been a clear beneficiary of the interest rate cycle. Not so much Treasury Markets.

Hence, the commercial book’s NIM remained firm in 2QFY2023 as asset repricing outpaced deposit cost. While the quarter’s blended exit NIM was 2.20%, average blended NIM was 2.16%, up 58 bps q-o-q. Blended net interest income of the commercial book, which rose 54% q-o-q, and Treasury Markets’ trading net interest income of negative $148 million translates to $3.43 billion, up 40% q-o-q.

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All in, for 2QFY2023, ROE reached a quarterly high of 19.2% while total income crossed $5 billion for the first time.

Second-quarter results were also buoyed by fee income, which rose 7% y-o-y in 2QFY2023, its first y-o-y increase in six quarters. Other non-interest income contributions saw fees from wealth management rise by 12% y-o-y, and card fees rose by 17% y-o-y.

During the quarter, credit costs remained low. Specific provisions of $114 million in the first quarter were just 10 bps of loans. On the general provisions front, DBS wrote back $42 million due to transfers to non-performing assets and credit upgrades. DBS group CEO Piyush Gupta guided for credit costs to remain at the lower end of an earlier 10-15 bps guidance.

Outlook: Not too bullish

Gupta guided that loan growth is likely to be in the “low single-digits” this year. “I thought we’ll be able to get 3% to 5% loan growth. We’re at zero half-way through the year,” he acknowledges. “A lot of the loans have shifted from our booking centres, principally in Hong Kong, back to the mainland,” Gupta says.

Chinese onshore rates are now lower than offshore rates, the converse of the past several years where offshore rates were low, and onshore rates were higher. Secondly, RMB has weakened against both USD and SGD. “So if you’re a borrower, you always want to borrow in depreciating currency. And that’s caused the shift of people borrowing on the mainland as opposed to Hong Kong,” Gupta reasons.

Gupta has broadened DBS’s sources of growth to include efficient liability management. “We do benefit from the rate hikes. But I wanted to reflect on two other parts. You have to have the quantity to apply to interest rates. In the past 7-8 years, our focus on digitising, on cash management, wealth, way before Covid, [underpinned] our transaction banking activity and allows us to have a large low-cost [deposit] base,” Gupta explains.

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The ability to tap the liquidity from its low-cost Casa and the repricing of the loan book supported the significant growth in earnings. As at FY2021, DBS’s net profit stood at $6.8 billion with a loan book of around $409 billion. As at 1HFY2023, the loan book is up just 1.4%, compared to Dec 31, 2021. In FY2023, DBS’s net profit may well get to $10 billion.

On the wealth management front, DBS private bank did not figure among the top 20 banks in Asia 13 years ago. DBS is now in the top three. As DBS grew its net interest income, its earnings were also boosted by fee income from wealth management, and Treasury Markets income which shifted from a proprietary book to a customer-focused business.

On risk management, Gupta says: “We’ve known about the China property market challenge for the past 2-3 years. We’re ahead of the curve. For interest rates, we’ve stressed our portfolio up to 7%. We’ve also stressed the book for dollar liquidity challenges repeatedly. We’re keeping a close eye on geopolitics.”

Geopolitics has driven up intra-Asia trade. “The China plus one phenomenon has led to an inbound flow of investment across the region. We’re able to capitalise on that, and on investment, wealth management and other activities. It’s not just the Western companies in China adopting China plus one, but Chinese companies as well,” Gupta says.

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