• Stay BUY, new SGD41.10 TP from SGD37.60, 20% upside with c.4% FY23F yield. 9M22 results met Street expectations with NIM expansion, sustained business momentum and solid asset quality being key positives. Management expects FY23 ROE to be comfortably above 15% (FY22F: 14%) with NIM expansion and recovery in fee income cushioning conservative assumptions on credit cost. The healthy ROE trajectory and robust capital should support a share price outperformance relative to the broader market.

• 9M22 results within Street expectations. DBS’ 9M22 net profit of SGD5.85bn (+8% YoY) was at 76% of consensus FY22F earnings, and at 71% of ours. Reported ROE was a higher 14.3% (9M21: 13.4%) while CET- 1 slipped to 13.8% (2Q22: 14.2%). A third interim DPS of SGD0.36 was declared. In 3Q22, PPOP surged by 27% QoQ, boosted by the 23% jump in NII and 14% rise in non-II that mitigated the 10% increase in opex. CIR improved to 40.2% vs 43.7% in 2Q22. With provisions up 287% QoQ, net profit growth moderated to 23% QoQ. See Figure 1 for details.

• Expects mid-single digit loan growth. DBS sees the risk of a US recession in 2023 that would lead to a sharper slowdown in Asia, especially if China’s easing of COVID-19 border restrictions takes longer than expected. Although this would likely moderate business momentum in 4Q22, DBS believes loan growth can reach a mid-single digit in 2023. For FY22, we expect loan growth of 5.8%, a moderation from the annualised growth of 6.4% for 9M22. The increase would be underpinned by non-trade corporates and mortgages.

• NIM to reach 2.25% by mid-2023. Tailwinds from the aggressive rise in the US Federal Funds Rate (FFR), which management believes could peak at 5.0%, could see NIM rise above 2.25% by mid-2023. Support should also come from SGD180bn of assets that will be repriced in 2023-2024. NIM rose 32bps QoQ to 1.90% in 3Q22 and is expected reach 2.0% in 4Q22. This increase would be somewhat capped by the expected decline in NIM from treasury markets and higher funding cost, given the attrition in CASA deposits.

• Fee income to recover in 2023. DBS’ wealth management business remain challenged in 4Q22, and could offset the recovery in fees from cards and transaction banking. Still, management is optimistic of double-digit fee income growth in FY23F, led by wealth management and cards.

• Prudent despite not seeing asset quality stress. Upgrades and recoveries led to a 5% QoQ fall in non-performing assets (NPA) while NPL ratio improved to 1.2% (2Q22: 1.27%). Although not seeing any stress in its portfolio, DBS has prudently topped up its general provision (GP) overlays that lifted NPA coverage to 120%. Management conservatively guides for specific provision (SP) credit cost to normalise to 20bps in FY23F from the 10-11bps in FY22F.

• Earnings and TP. Our FY23-24F earnings are raised by 9-14%, but we shaved FY22F net profit by 2% (Figure 3) as we factored in higher NIMs and provisions. The new SGD41.10 TP (from SGD37.60) incorporates a 4% ESG premium based on RHB’s in-house methodology (Figure 4).

Source: RHB Research - 4 Nov 2022