• DBS's 1H22 earnings were within expectations, as positive NIM (net-interest margin) surprise offset non-II (non-interest income) 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.
• DBS's share price has retreated 10% in the past 6 months on rising macroeconomic concerns. With FY23 ROE projected to rise to 15%, the current 1.4x FY22F P/B valuation is compelling.
• Stay BUY on DBS with new S$37.60 target price from S$38.10, 16% upside with ~4.5% FY22F yield.

DBS's 1H22 Results in Line

• DBS (SGX:D05)'s 1H22 earnings of S$3.62bn (-3% y-o-y) 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 dividend of S$0.36 was declared.
• In 2Q22, PPOP rose a modest 1% q-o-q, as robust NII growth of 12% q-o-q was negated by lower net fee income (-14%) and other non-II (-15%). CIR was stable at 43.7%.
• With provisions down 16% q-o-q, net profit ticked up 1% q-o-q. Specific provisions (SP) credit cost was 8bps (1Q22: 15bps).

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.

NIM the Bright Spot

• 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 net interest income (NII) would rise by S$18-20m 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 y-o-y in FY22.

Asset Quality Resilient

• Non-performing assets (NPA) was little changed in 2Q22. NPL ratio was stable q-o-q 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.
• DBS's exposure to China’s real estate sector is a small S$2bn with no stress detected. SP credit cost of 11bps in 1H22 is lower than FY22F guidance of 15-20bps (FY21: 12bps).

Earnings Forecast and Target Price for DBS

• We raised FY22F-24F earnings forecast for DBS by 4-8% as we pencilled in higher NIMs, which helped offset downward revisions in non-II. Our target price for DBS is lowered to S$37.60 as we raised the equity risk premium for geopolitical tensions and recessionary risks.
• Our target price for DBS incorporates a 4% ESG premium based on RHB’s in-house methodology.

Source: RHB Invest Research - 5 Aug 2022