• Stay NEUTRAL and MYR35.70 TP, 12% upside. DBS has been instructed by the Monetary Authority Singapore (MAS) to top up an additional capital requirement for operational risk by c.SGD670m to a total of SGD1.6bn following the latest outage in its digital banking services on 5 May. While the 30bps impact on CET-1 ratio is unlikely to affect dividend payout for FY23F, we believe the digital glitch, coupled with the negative revisions in FY23F guidance post-1Q23 results would weigh on share price performance.

• Another disruption in digital services. On 5 May 2023, DBS customers in Singapore were unable to use the bank’s digibank online and mobile service for about 45 minutes. Even its physical ATMs were said to be down. In a statement issued, the bank said its digital systems returned to normal at 1:30pm. Friday’s digital glitch comes a little after a month following the 12.5- hour disruption on 29 Mar 2023.

• MAS imposes further additional capital requirement. A press statement released by MAS on the night of 5 May revealed that the regulator has imposed on DBS an additional capital requirement for the disruptions to its digital banking services on 29 Mar and 5 May. The bank is now required to apply a multiplier of 1.8x to its risk-weighted assets or RWAs for operational risk. MAS added that it may subsequently vary the size of the multiplier depending on the outcome of ongoing reviews. Recall that in Feb 2022, DBS was instructed to raise the multiplier to 1.5x following the Nov 2021 disruption.

• Shaves CET-1 by 30bps. The higher multiplier of 1.8x translates to approximately SGD1.6bn in total additional regulatory capital, up from the SGD930m imposed in Feb 2022. DBS explained that MAS’ regulatory action will lower its Mar 2023 CET-1 ratio by 30bps to 14.1%. Despite the slippage, the bank’s CET-1 ratio remains above management’s target range of 12.5- 13.5%. Furthermore, DBS estimates a 200bps enhancement to its CET-1 ratio from the Basel IV adjustments (implementation date to be announced in Jul 2023). We are keeping our DPS forecast of SGD1.76 for FY23, which translates to a dividend payout of 43% (FY22: 47% or SGD2.00 which included a special dividend of 50 SG cents).

• Investigations to now cover the May incident as well. Although the causes of the March and May incidents appear distinct from each other, MAS has now required DBS’ review to cover the May incident as well. Following the outage in March, the bank has established a special board committee to oversee the investigations. External experts with deep experience in overseeing large-scale IT systems and operations have also been engaged to work with the committee.

• ESG score of 3.1 out of 4.0. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 8 May 2023