DBS Group Earnings: Net Interest Margin Expansion Drives Another Very Strong Quarter

We keep our fair value estimate of SGD 41 for DBS Group D05, equivalent to 1.8 times 2023 projected book value and 21% above the current share price.

Second-quarter earnings were even better than the first quarter, with annualized return on equity of 19.2% (compared with 18.6% in the prior quarter and 13.4% a year earlier). This is above DBS’s midcycle return on equity, or ROE, of 15%-17%, thanks mainly to wide net interest margins following the U.S. interest-rate hikes. Notwithstanding the temporary benefit from higher interest rates, DBS’ earnings strength was broad-based, in our view. Expense control remained excellent even with one-offs for the integration of Citibank’s Taiwan operation, with the cost/income ratio remaining below 40%. Asset quality improved from a quarter ago despite the slowdown in many Asian economies, leading to annualized credit cost of only 7 basis points of loans (10 basis points in specific provisions and a writeback of general provision given improvement in credit indicators across many borrowers).

Looking forward, we expect net interest margin to remain near current favorable levels for the second half before narrowing by 5 basis points a year from 2024. Even so, we expect ROE to remain well above 15% and think DBS merits a valuation around 1.8 times book value, as compared with 1.5 times currently. The main catalyst for upward rerating, in our view, will be increased shareholder distributions such as the hike in quarterly dividend to 48 cents a share from 42 cents this time. Additional increase could come in the form of ordinary dividend step-ups, special dividends, and/or share buybacks. Our forecasts assume that all three of these occur every year, although it is possible that 2023 will skew toward dividends instead of buybacks. We think a buyback announcement would be positive as it would show that the board, like us, views the shares as undervalued relative to DBS’ earnings power.