DBS 4Q Earnings Preview: Potential Softening Due to Declining Net Interest Margins and Loan Volumes

As one of Singapore's largest banks, DBS has consistently drawn investors' attention. Seasonal softness may weigh on the results, potentially leading to subdued performance in the 4Q earnings report. However, in the 3Q guidance, the bank's executives suggested that they anticipate net profit to hover around the record levels achieved in 2023, despite macroeconomic and geopolitical uncertainties. DBS is scheduled to release its financial report on February 7.

According to Bloomberg forecasts, DBS is projected to report fourth-quarter revenue of SGD 4.97 billion, marking an 8.34% increase year-over-year. The EPS is estimated at SGD 0.94, a sequential rise of 3.3%.

According to the analyst rating feature on moomoo, the average target price from 18 analysts stands at SGD 36.78, with the highest price target at SGD 43.14, representing a 14% premium over the current price. Among these analysts, 50% have issued a 'Buy' rating, while 33.3% have assigned a 'Hold' rating.

For Singapore's banking sector, deposits grew 4% year-on-year in November 2023, outpacing the 3% decline in loans. Given the current high interest rates and a gloomier global economic forecast for the fourth quarter, deposit growth in Singapore's banks continues to surpass loan growth. Over the past few quarters, DBS has maintained its deposits at a stable level of around SGD 580 billion, with no significant fluctuations.

DBS is likely to maintain low mortgage default rates, supported by strong income and employment levels that may counteract the impact of rising interest rates. Among the local banks, as of 2Q23, the average probability of default of DBS's mortgages was the lowest at 0.5%. Delinquency rates also stayed below 1% for borrowers over 21, per Credit Bureau Singapore.

Moreover, DBS's loan exposure to income-producing real estate (IPRE), rated internally based on Basel's supervisory slotting approach, implies limited risks in its overall risk profile despite rising macro threats and elevated interest rates. This is because most of DBS's IPRE loan exposure was rated "strong" and "good."

Net interest income (NII) may lose momentum in 4Q of 2023. In the 3Q of the year, NII saw a YoY increase of 16% to SGD 3.5B.

Source: Bloomberg

Furthermore, heightened interest rates have increased borrower sensitivity to the costs associated with new loans, potentially leading to diminished demand for high-interest loans as the elevated cost of borrowing compels corporate clients to repay existing debts. These factors could contribute to a further decline in loan volumes in the fourth quarter of 2023.

In terms of personal mortgage lending, the robust loan pipeline established over the past few years may bolster the bank's mortgage growth this year, even as the number of housing projects receiving temporary occupation permits in 2024 experiences a decline. Nevertheless, amid persistently high interest rates and government cooling measures, the growth in mortgage lending for the year may remain flat or achieve low single-digit expansion.

Additionally, DBS Bank's acquisition of Citigroup Taiwan may boost fee income from higher credit card fees. Meanwhile, the bank's operating expenses could surpass projections owing to digital banking upgrades amidst regulatory focus on service interruptions. In Q3 2023, non-interest income grew by 5%, partly due to modest growth in wealth management and card revenues.

By moomoo news Georgina