• Stay BUY, new SGD37.60 TP from SGD38.10, 16% upside with c.4.5% FY22F yield. 1H22 earnings were within expectations, as positive NIM surprise offset non-II weakness. FY22F earnings are projected to rise by a robust 21% on continued NIM expansion in 2H22 and benign credit cost compensates for still subdued non-II. Share price has retreated 10% in the past six months on rising macroeconomic concerns. With FY23 ROE projected to rise to 15%, the current 1.4x FY22F P/BV valuation is compelling.

• 1H22 results in line. 1H22 earnings of SGD3.62bn (-3% YoY) accounted for 47% and 49% of our and Street’s FY22F bottomline. Reported ROE was 13.3% (FY: 12.5%) while CET-1 was stable at 14.2%. An interim DPS of SGD0.36 was declared. In 2Q22, PPOP rose a modest 1% QoQ, as robust NII growth of 12% QoQ was negated by lower net fee income (-14%) and other non-II (-15%). CIR was stable at 43.7%. With provisions down 16% QoQ, net profit ticked up 1% QoQ. Specific provisions (SP) credit cost was 8bps (1Q22: 15bps) (see Figure 1).

• Loan growth guidance toned down. DBS expects US interest rates to peak at 3.5-4%, with inflation tempered and the US economy slipping into a mild recession. The flow-through to Asia is likely to be contained. That said, management sees some tail risks from geopolitical developments in Russia-Ukraine and China. Consequently, loan growth guidance is dialled down to mid-single digit from an earlier target of mid-to-high single digit.

• The bright spot remains tailwinds from sharper- and faster-than-expected hikes in the US Federal Funds Rate that will have a positive impact on NIM over two years. NIM, which has reached 1.80% in July (2Q22: 1.58%), is expected to rise above 2% by 4Q22. This compared with earlier guidance of 1.58-1.6% in FY22 with the exit rate at 1.8% (FY21: 1.45%). DBS reiterated that NII would rise by SGD18-20m on every 1bp hike in US rates.

• Fee income to remain subdued. Management believes fee income has bottomed in 2Q22. That said, uncertainty in capital markets would continue to weigh on the wealth management business as investors stay side-lined. Overall, fee income is expected to decline YoY in FY22.

• Asset quality resilient. Non-performing assets (NPA) was little changed in 2Q22. NPL ratio was stable QoQ at 1.27% and NPA coverage a comfortable 113% (4Q21: 116%). Having tightened its portfolios over the past two years, management believes customers would be able to absorb the higher interest rates. Exposure to China’s real estate sector is a small SGD2bn with no stress detected. SP credit cost of 11bps in 1H22 is lower than FY22F guidance of 15-20bps (FY21: 12bps).

• Earnings and TP. We raised FY22F-24F earnings by 4-8% as we pencilled in higher NIMs, which helped offset downward revisions in non-II. Our TP is lowered to SGD37.60 as we raised the equity risk premium for geopolitical tensions and recessionary risks. Our TP incorporates a 4% ESG premium based on RHB’s in-house methodology (Figure 4).

Source: RHB Research - 5 Aug 2022