• Stay NEUTRAL, with new SGD36.30 TP from SGD33, 7% upside. 2Q23 slightly beat on lower-than-expected credit cost (CoC) while NIM continued to trend higher. Given the strong results, and meeting its guidance for a baseline increase in DPS of 24 SG cents pa, DBS raised 2Q DPS to 48 SG cents (1Q: 42 SG cents). While 2Q is largely positive, we remain wary of the sharp rate hikes’ impact on asset quality and beyond that, the turn in the interest rate cycle, with which DBS has significant leverage.

• 2Q23 – a slight beat. DBS’ 1H23 net profit of SGD5.2bn (+44% YoY) was ahead of estimates, at 53-54% of our and consensus FY23F PATMI, with lower-than-expected CoC and NIM continuing to drift higher. Reported ROE improved to 18.9% (1H22: 13.3%) while CET-1 was 14.1% (1Q23: 14.4%). 1H DPS was 90 SG cents (1H22: 72 SG cents) – a 45% payout ratio. In addition to its dividend guidance above, DBS estimates a further SGD3bn (SGD1.20/share) can be returned to shareholders in the coming years as part of its capital management plan.

• QoQ, net profit rose 2%, driven by lower loan allowances (-55% QoQ) as DBS wrote back SGD42m in general allowances (1Q23: SGD99m charge) due to transfers to non-performing assets (NPA) and credit upgrades. PIOP was flat with stronger NII (+5% QoQ), underpinned by 4bps QoQ NIM expansion and offset by a 3% drop in Non-II and higher opex (+6% QoQ).

• Loan growth stayed subdued (flat QoQ/-2% YoY) due to market softness (macro plus a shift from offshore to onshore on lower onshore rates and weaker CNY) and unattractive loan pricing. Non-trade corporate and trade loans are expected to pick up in 2H but given the flat loan base YTD, DBS downgraded its FY23F loan growth to a low single digit, from 3-5%.

• Fee income growth dialled down to a mid-single digit (from high single digit) for FY23 due to the slower-than-expected pick up in 2Q. That said, 2H growth momentum should improve thanks to higher card spending and stronger wealth management fees on better market sentiment.

• More optimism on FY23F NIM. Given the QoQ NIM expansion, coupled with the recent hike in US Federal Funds Rate and higher Hong Kong Interbank Offered Rate (HIBOR), both unexpected by DBS, management now thinks there could be an upside bias to NIM from current levels. Also, c.20% of its commercial book has yet to be repriced while deposit pricing pressure is easing as system liquidity remains ample as well as weak loans growth.

• Asset quality held up with NPA stable QoQ, while NPL ratio and coverage were unchanged at 1.1% and 127%. DBS is not seeing any signs of stress in its portfolio, and highlighted that its watchlist improved, having shrunk over the past year. As such, FY23 specific allowances are guided to end up at the lower end of the 10-15bps range.

• Earnings and TP. We raise FY23F-25F earnings by 3-6% as we factor in higher NIM and lower CoC, while FY23F-25F DPS is lifted by 7-9% on the 2Q DPS boost. TP rises to SGD36.30 and includes a 2% ESG premium.

Source: RHB Research - 4 Aug 2023