DBS Group: Comprehensive Financial Analysis and Future Projections

Broker: Maybank Research Pte Ltd

Date of Report: November 7, 2024

Introduction

DBS Group, the largest bank in Southeast Asia by assets, has consistently shown strong performance and resilience. This detailed analysis covers the financial results, growth trajectory, and future projections of DBS Group, providing a comprehensive understanding for investors and stakeholders.

Strong Base for Growth, Plus Capital Returns

DBS Group’s 9M24 earnings exceeded expectations, supported by robust trading and fee income. These positive trends are expected to continue in the near term. Net interest income (NII) could see support from loan growth recovery and stable net interest margins (NIMs). The SGD3 billion share buyback is a positive step, and we anticipate increased progressive dividends going forward. The target price (TP) is raised to SGD46.91, maintaining a BUY recommendation.

Recovering Non-Interest Income (NoII) Trajectory

NoII performed better than expected, driven by a significant increase in 3Q24 market trading income on DBS’s own books, which jumped 53% YoY due to FX, rate, and equity derivative volatility. Wealth Management also rose 56% YoY, with clients shifting from fixed deposits to higher-fee activities. Overall wealth assets under management (AUM) increased 14% YoY, contributing to higher fees as relationship managers (RMs) ramp up activities. Management is guiding for high single-digit fee growth in 2025, and we project NoII to rise by 3-8% from 2024 to 2026.

NIM Falling, But NII Could Hold Up

NII exceeded expectations, with the commercial book holding up well. NIMs fell by 3 basis points YoY and QoQ due to deploying liquidity to products with accounting asymmetry. However, we expect measured NIM declines going forward, given hedging and potential delays in Fed rate cuts. Loan growth was disappointing due to large repayments, but DBS sees a good pipeline of new credit demand in renewables, TMT, and property sectors. Management expects a low single-digit recovery in 2025, which should offset weaker NIMs. Asset quality remains benign, with non-performing loans (NPLs) falling to 1%.

Returning Cash and Raising TP

Even with the full implementation of BASEL4, CET1 would be high at 15.2%. Management announced a SGD3 billion share buyback and cancel program, which, upon completion, should reduce CET1 by 0.8 percentage points and increase EPS by 3% at current prices. This program may take 2-3 years. Additionally, DBS is likely to raise progressive dividends higher, and we have upgraded 2024-26 DPS forecasts by 1-11%. The multi-stage discounted dividend model (DDM) with a cost of equity (COE) of 9.9% and a 3% terminal value has raised the TP to SGD46.91 from SGD44.06, maintaining a BUY rating.

Price Performance and Statistics

DBS Group’s share price stood at SGD 41.70 with a 12-month price target of SGD 46.91. The previous price target was SGD 44.06. The company has a market capitalization of SGD 106.9 billion (USD 80.2 billion) with 2,564 issued shares and a free float of 121.5. Major shareholders include Temasek Holdings, Capital Research, and The Vanguard Group.

Financial Metrics and Performance

Operating income for FY22A was SGD 16,502 million, increasing to SGD 20,162 million in FY23A. Projections for FY24E, FY25E, and FY26E are SGD 21,800 million, SGD 22,543 million, and SGD 23,734 million respectively. Core net profit for FY22A was SGD 8,193 million, with FY23A at SGD 10,286 million, and predictions for FY24E, FY25E, and FY26E at SGD 11,090 million, SGD 10,989 million, and SGD 11,560 million respectively.

Value Proposition

DBS Group holds over 50% market share of SGD CASA deposits through a strong heartland banking franchise, with a robust USD funding base through HK operations. The current strategy refocuses on commercial banking, with increasing presence in South and South Asia, particularly India and Indonesia. An early adopter of technology, DBS leverages automation for new revenue streams and cost savings.

Price Drivers and Financial Metrics

The share price has been influenced by various factors, including the start of the COVID-19 pandemic, announcement of successful COVID-19 vaccine trials, slowing growth fears, higher NIM expectations, and NoII-driven growth with expectations of higher-for-longer rates. NIMs are set to fall slightly YoY in 2024E, with improved economic outlook in Southeast Asia keeping asset quality benign. However, the high-rate environment could drive NPLs to 1.3% by 2026E. Core-ROE is expected to average 16.4% in 2024-26E.

3Q24 Results Summary

DBS Group’s 3Q24 results showed a slight improvement in NII YoY, driven by commercial book NIMs holding up and flat loans. NoII saw stronger than expected growth, driven by strong trading income and record fee income levels rising 32% YoY. Total income increased 10.8% YoY, with total expenses rising 10.4%, primarily due to Citi Taiwan. Profit before allowances (PPOP) increased 11.1% YoY, with allowances for credit and other losses declining 39.5% YoY. Core net profit rose 15.0% YoY.

Detailed Assumptions and Key Metrics

Loan growth, consumer loan growth, and corporate loan growth are projected to increase moderately from 2024E to 2026E. CASA deposit growth is expected to recover, with improved cash and balances with central banks as a percentage of deposits. The loan to deposit ratio is expected to stabilize around 80-85%. NIM is projected to remain steady around 2.00-2.02% from 2024E to 2026E. Pre-provision profit, net interest income, and non-interest income are expected to grow steadily.

Conclusion

DBS Group continues to demonstrate strong financial performance and resilience, supported by robust trading, fee income, and stable NIMs. With strategic initiatives and a strong pipeline of new credit demand, DBS is well-positioned for future growth and capital returns. The upgraded TP of SGD 46.91 and maintained BUY rating reflect confidence in DBS Group’s continued success.