DBS Q1 Earnings Preview: Dividends Set to Support Stock Price Despite Unsurprising Earnings

As one of the most actively traded stocks, DBS has risen by 17% since this year. However, analysts suggest that the forthcoming earnings report is not anticipated to deliver any remarkable surprises. According to S&P data, DBS Bank is expected to announce a consensus revenue of SGD 5.06 billion on May 2nd. While this represents a year-over-year increase of 2.44%, it is lower than the SGD 5.192 billion reported in the fourth quarter of 2023. In addition, the consensus EPS is SGD 0.91, a modest increase of 0.14% over the previous year.

RHB Invest states that DBS Bank's first quarter earnings for 2024 are expected to remain subdued, but a shift in revenue growth from Net Interest Income (NII) to a dominant non-interest income should facilitate the release of capital and support capital return plans. In addition, DBS Bank has committed to an annual dividend increase of SGD 0.24 per share, implying that its absolute dividend per share will continue to grow.

Despite the earnings remaining flat, several analysts are still positive about DBS's prospects. As of April 30th, according to the analyst rating feature on moomoo, the average target price from 18 analysts stands at SGD 35.93, with the highest price target at SGD 42.75, representing a 23% premium over the current price. Among these analysts, 67% have issued a 'Strong Buy' rating, while 6% have assigned a 'Buy' rating.

UOBKH analyst Jonathan Koh expects a moderate rebound in DBS Bank's loan growth, with a modest increase of 0.8% year-over-year and a 1.0% quarter-over-quarter growth for the first quarter of 2024. Koh stated in a report, "Industry statistics show that corporate loans grew 1.6% month-over-month in February 2024, suggesting that the weakness in corporate lending and customer repayments has eased." RHB Invest has expressed a similar view, noting that the trend of higher repayments persists and a softer growth environment has led to competitive pricing pressure in the mortgage segment—to date, DBS has avoided competing aggressively in this area. Therefore, RHB believes its loan growth for the first quarter is likely to align with its guidance of low single-digit growth.

However, Koh indicates that DBS Bank's Net Interest Margin (NIM) is expected to decline by 4 basis points to 2.09%, dragged down by the reduced profitability of Hong Kong dollar loans, which account for 11% of its total loan portfolio. This is due to a 43 basis point (bps) decrease in the Hong Kong Interbank Offered Rate (HIBOR) to 4.72% during the first quarter.

Bloomberg's data also indicates a weakening trend in DBS's NIM: the NIM for Q1 is projected to be 2.1%, a year-over-year decrease of 1.03%.

Despite the market's expectations for Federal Reserve rate cuts dropping from 6-7 at the beginning of the year to just 2 now, such a change is not significant enough to substantially alter their NIM projections. DBS anticipates that any additional cuts would occur towards the end of 2024 and thus, would have a limited impact on their yearly NIM guidance. JPMorgan notes that recent data demonstrating the resilience of the U.S. economy has reduced the market's expectations for steep rate cuts in 2024, which supports a more favorable outlook for NIM. As a result of the adjusted rate cut expectations, NIM is anticipated to contract, but at a slower pace compared to previous expectations.

The growth of assets under management (AUM) has been robust, and improved market sentiment is anticipated to enhance wealth management opportunities for 2024. Koh suggests that due to the "initial excitement sparked by a potential rate cut earlier this quarter," the contribution from wealth management is expected to grow by 10% compared to last year, reaching $400 million.

The thriving Singaporean economy is not only enhancing visibility for wealth management revenues but also contributing positively to a wider range of financial services, including fees and loan demand. JP Morgan's March report underscores this trend, attributing the continued growth in AUM and fee income at DBS to the decade-long development of its wealth management capabilities and the resilience of Singapore as a leading financial hub.

Additionally, the acquisition of Citibank's Taiwan business aids in bolstering non-interest income growth. DBS expects to wrap up its S$80 million tech upgrade by March 2024. This year, the integration of Citi Taiwan will be the main driver of increased operating expenses, which are forecasted to grow in the high single digits. However, DBS is confident that contributions from Citi Taiwan and non-interest income growth will keep the cost-to-income ratio below 40%.

UOBKH forecasts that banks will maintain stable asset quality despite increasing interest rates. For DBS, the formation of non-performing loans (NPLs) is expected to remain mild, with a consistent NPL ratio of 1.1% projected for the first quarter. "DBS has accumulated ample management overlay for general provisions of S$2.2b set aside previously during the COVID-19 pandemic. We expect DBS to set aside total provisions of S$213m and incur credit cost of 20bp in 1Q24," UOBKH said in a note.

JP Morgan and RHB Invest anticipate that despite the risk of a subdued NIM, leading to relatively modest net profits in 2024, the stock price will be significantly influenced by dividend yield and capital conditions. DBS CEO Piyush Gupta stated that if the federal funds rate settles into a new normal of 3%, DBS Bank will be positioned to achieve an equity return of 15-17% over the next 3-5 years, signaling high returns on equity and a robust dividend payout ratio.