DBS Earnings: Singaporean Bank Delivers Another Excellent Quarter; Our Focus Is on Year-End Dividend

We keep our fair value estimate of SGD 41 for DBS Group D05, equivalent to 1.8 times 2023 projected book value and 22% above the current share price.

DBS maintained return on equity, or ROE, above 18% for the third quarter in a row, topping the 15%-17% range where we assume the group’s midcycle ROE to be, thanks again to wide net interest margins following the U.S. interest-rate hikes. A positive development for DBS this quarter was that its fee income growth, which was still negative at the beginning of 2023, accelerated to 9% year-on-year growth as credit card and wealth management fees both grew more than 20% from the same quarter a year ago. Quarter on quarter, wealth management fees were up 4% and card fees rose 14%. DBS’ expense control also remained excellent, with the cost/income ratio remaining below 40%. One negative was close to SGD 100 million in allowances for exposures linked to a recent money laundering case in Singapore, but annualized credit costs remained lower than peers’ even with these allowances, partly thanks to DBS’ minimal exposure to commercial real estate in the U.S. DBS guided for credit costs of 17 to 20 basis points of loans in 2024, compared with UOB’s guidance of 25 to 30 basis points next year.

With net interest margins having likely peaked this quarter and a cloudy outlook for loan growth, we expect DBS’ earnings to grow only by around 1% annually over the next few years. However, we still view the shares as attractive at their current level of around 1.5 times book value, given our outlook for ROE to remain well above 15%. The main catalyst for upward rerating, in our view, will be increased shareholder distributions. We no longer forecast a buyback at year-end, anticipating a larger year-end special dividend instead, but we continue to forecast that DBS will conduct share buybacks in 2024 and beyond as it will have substantial excess capital even assuming that it lifts its dividend payout ratio to 60% or more.