• BUY this sector Top Pick, TP rises to SGD38.30 from SGD36.70, 8% upside with c.6% FY24F yield. We recently met DBS for an update. We expect earnings to stay muted but the shift to non-II-led income growth from NII should free up capital and support capital return initiatives. As such, in a scenario of flattish earnings as the interest rate cycle turns, DBS’ commitment to increase DPS by 24 SG cents pa means its absolute DPS will continue to grow, and investors should have a solid view on its trajectory.

• 1Q24 loan growth should still be muted, amidst the ongoing trade-off between NIM and loan growth. The trend of higher repayments has persisted, and the softer growth environment has led to competitive pricing pressure in the mortgage segment – which, so far, DBS has avoided competing aggressively in. Hence, we think its 1Q loan growth is likely to track its own guidance of low single-digit growth.

• NIM guidance of a few bps squeeze to hold for now, despite the shift in market expectations on the number of US Federal Funds Rate (FFR) cuts to three (vs 6-7 cuts earlier and DBS’ assumption of five cuts in its NIM guidance). Despite the shift in expectations, DBS does not think the difference would be meaningful enough to impact its NIM guidance as the additional cuts it expects would have been towards the tail-end of 2024.

• Non-II looks decent, although it is still early days. Growth of its assets under management has been healthy and improved market sentiment should allow for better wealth management opportunities and help drive the double-digit fee income growth guided for 2024. As for opex, DBS’ tech uplift programme (SGD80m commitment) should be largely done by Mar 2024. That said, the main opex pressure this year would be from the full-year consolidation of Citi Taiwan (TW). While opex growth was guided to be at a high single digit, DBS was confident that the full contribution from Citi TW at the topline level plus non-II growth should help cap the CIR at a low 40% level. Also, with no red flags on asset quality, management was comfortable with its specific provisions charge off guidance of 17-20bps.

• Dividends. DBS reiterated its commitment to increase absolute DPS by 24 SG cents, which takes into account the 1-for-10 bonus issue. Management also highlighted that, in recent years, the trend has been for a bump up in 4Q DPS and this is likely to be retained. As such, we raise FY24-26F DPS by 6 SG cents pa as we bring forward the DPS uplift by a quarter. We now expect FY24F absolute DPS to rise by 30 SG cents, followed by 24 SG cents pa in FY25-26. These figures exclude further initiatives down the road to return excess capital, since its CET-1 ratio will move up by 2%-pts (transitional basis) when the Basel IV regime kicks in later this year.

• Keeping to medium-term ROE guidance of 15-17%, which takes into account a normalised FFR. Hitting the top end of the range requires its India and non-II businesses to be firing on all cylinders.

Source: RHB Research - 26 Mar 2024