DBS Bank reported its 1H23 earnings with Maybank IB noting that it was ahead of the street and its own expectation. The Group’s strong franchise is helping asset yields expand in the current higher-for-longer interest rate environment while keeping funding cost escalations under control. Strong wealth management inflows are poised to deliver additional growth as market conditions turn. These factors should be supportive of higher sustainable medium-term ROEs as well as materially increased dividend upgrades. Asset quality in a slowing growth environment is a key risk. Raise TP to SGD39.36.
With a Buy call, Maybank IB says further Fed hikes and higher HIBOR in HK pushed Group 2Q NIMs +4bps QoQ. While quarterly data is not available, 1H23 loan yields increased +106bps HoH, whilst deposit costs expanded just +88bps. This points to the strength of DBS’ deposit franchise giving it the ability to manage funding costs reasonably. With at least one more Fed hike expected, the house raises its 2023E NIMs by +7bps. Separately, wealth management (WM) attracted SGD12bn of net new money in 1H, where nearly half is sitting as deposits. WM activities have seen a pick up over the past few weeks in a risk-on environment, according to Management. Hence, fee income – which disappointed in 1H – could see improved prospects in 2H, in its view. The Group’s focus on large corporates seems to be keeping asset quality supported with NPLs falling -16% YoY in 2Q. The house has lowered NPL assumptions by 9-10% for 2023-25E, but remains cautious on asset quality going forward.
DBS also surprised with an SGD0.06 QoQ increase in DPS, when normally such hikes are reserved for 4Q. It plans to increase base dividends by SGD0.24 YoY. Additionally, there is SGD3bn (SGD1.20/sh) of excess capital Management plans to release going forward. While special dividends are one possibility, Maybank IB thinks there is potential for the base dividend to be raised above the minimum guided range over the medium term.
Following 2Q23, the house raised 2023-25E earnings by 4-6%. The multi-stage DDM (COE 9.9%, 3% terminal) TP has been raised to SGD39.36 from SGD38.51. At this TP, DBS would trade at 1.6x PB. Maybank IB thinks this is reasonable for an implied medium term ROE of 15%. Indeed, Management claims they are confident of defending 15-17% medium-term ROE.
