Review

• DBS reported a strong set of 3Q results, with net profit rising by 8.5% QoQ to S$3,027mn. 9MFY24’s net profit climbed 12.5% YoY to S$8,767mn, underpinned by higher operating income and lower allowances. ROE was quite steady at 18.8% vs. 18.6% in 9MFY23. DBS’s results exceeded our expectations, accounting for around 81% of our full-year forecast.

• A higher interim dividend of 54 cents per share (3QFY23: 44 cents per share) was declared.

• 9MFY24 total income rose 11% YoY to another record high of S$16,792mn, underpinned by a 5% and 23% YoY rise in the net interest income (NII) and non-interest income (non-NII). By segment, the commercial book reported total income growth of 10% due to higher net interest margin (NIM), balance sheet expansion and stronger fees and treasury customer sales. Markets trading income also broadened by 25% YoY. Fee income jumped 26% YoY to S$3,740mn, driven by higher Wealth Management fees, followed by loan-related, loan-related fees, stronger card fees and transaction services.

• Group NIM was eased QoQ and YoY to 2.11% in 3Q24 and 2.13% in 9M24. Meanwhile, loan growth was also relatively stable, rising 2% YoY (in constant-currency terms), driven by trade and non-trade corporate loans. Meanwhile, QoQ loans also grew by 1%, underpinned by higher trade loans.

• Elsewhere, total deposits broadened by 2.0% QoQ, spurred by CASA inflows, which management noted, some of which were transitionary. While FDs remained robust, total CASA balances broadened slightly to S$282bn vs S$278bn in 2Q. The CASA ratio climbed to 52% vs 46% in June 2024.

• 9MFY24 overhead expenses broadened by 11.1% YoY to S$6,500mn from S$5,851mn a year ago. The increase was underpinned by 1) higher staff expenses (+12.4% YoY) due to salary increments and higher bonus accruals, along with rising headcount from the addition of staff from Citi Taiwan, and 2) other expenses (+8.8% YoY). 9MFY24 cost-to-income (CTI) ratio was steady at 39% (9MFY23: 39%).

• Total allowances declined YoY to S$413mn in 9MFY24. During the period, SPs improved by 12% YoY to S$330mn, cushioning the 11% increase in GPs. 9MFY24 SP charge stood at 11 bps (9MFY23: 11 bps). Meanwhile, total NPAs shrank to S$4,680mn in 9MFY24 vs S$4,977mn in 9MFY23 as an increase in the formation of new NPAs was offset by upgrades and writeoffs. With that, the headline non-performing loans (NPL) ratio strengthened to 1.0% from 1.2% in 9MFY23. Total allowance reserves rose QoQ to 135% (3QFY23: 125%).

• DBS’ Core Equity Tier 1 (CET1) ratio remained well above regulatory requirements at 17.2% (September 2023: 14.1%). Elsewhere, DBS reported a Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) at 144% and 115%, respectively.

Impact

• Realigning our forecasts to the better-than-expected 9M results performance, we raised FY24/25/26 net profit to S$11,357/11,482/12,070mn from S$10,876/11,450/12,665mn, previously.

Outlook

• DBS delivered another robust set of results, with YTD net profit reaching a record high and surpassing estimates. Key drivers included 1) stable loan growth and NIM, 2) an increase in net fee income bolstered by strong performance in wealth management, and 3) higher income from market trading activities. Operating expenses were well managed, maintaining a stable CTI ratio. Asset quality remained solid, with the NPL ratio holding steady at 1.1%, and SP remained low at just 11 bps of loans. The quarter concluded with a YoY increase in the interim dividend to 54 cents.

• Management anticipates a modest YoY decline in 2025 net profit, primarily driven by Singapore's implementation of a 15% global minimum tax, impacting large multinational corporations. This tax adjustment, alongside expectations of a slight dip in NII from a projected decline in group NIM, could weigh on earnings. However, management expressed cautious optimism regarding NIM, noting that the anticipated policies under the incoming Trump administration — specifically, potential tariff increases — could fuel inflation. If inflationary pressures rise, the Federal Reserve may reduce the pace of interest rate cuts, which could, in turn, bolster NIM in the coming year.

• Loan growth is expected to gain momentum, benefiting from lower interest rates. This growth, along with robust contributions from market trading activities and fee income, should help offset the impact of lower NIM on earnings. Trading income is anticipated to improve due to lower funding costs, while fee income is driven by wealth management fees and treasury customer sales. Elsewhere, overhead expenses are projected to remain tightly managed, with the CTI ratio expected to stay in the low 40% range. Asset quality should remain stable, as management has not observed signs of stress in the portfolio. While there is potential for GP writebacks, SP charges could normalise to around 17-20 bps.

• DBS Group announced that its Board has approved a new S$3bn share buyback programme. Shares will be repurchased in the open market at management’s discretion, depending on prevailing market conditions, and subsequently cancelled. Management indicated that, upon completion, the buyback is expected to reduce the fully phased-in CET1 ratio by approximately 0.8%-points.

Valuation

• We adjust DBS’s TP to S$45.85 from S$39.10 on the back of the upward revision to our earnings. The TP is derived from an implied PBV of c. 1.74x, based on the Gordon Growth Model and 3% ESG premium. Buy reiterated on DBS.

Source: TA Research - 8 Nov 2024