DBS Group Holdings(SGX: D05)：Thriving Companies Excelling in Uncertainty

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FY24 Q1, the total income increased 13% yoy to $5.56 billion, with commercial book total income increasing 14% to $5.31 billion.

Net Interest Income: Overall net interest income reached SGD 3.505 billion, up 7% year-over-year. For the main sources of commercial book income, net interest income grew 8%, driven by a higher net interest margin which increased by eight basis points to 2.77% due to higher interest rates, while loans grew by 1%.

Non-Interest Income: For the main sources of commercial book income, net fee income grew by 22.5% and crossed $1 billion for the first time, driven by increases in wealth management and loan fees. Treasury customer sales and other income also reached a new record, growing 44% year-over-year.

Net profit: 1Q net profit saw a 15% increase year-over-year, hitting a new quarterly high of SGD 2.96 million, alongside a return on equity that reached 19.4%. This accomplishment is primarily attributable to expansive growth across the company's operational domains.

DBS Group's cost-income ratio (CIR) for the first quarter stood at 37%, a marginal decline from the 38% reported a year earlier. Amidst business expansion, total expenses escalated to SGD 2.079 billion, registering a 10% growth year-over-year, with the primary driver being increased staff expenses.

In the first quarter, loan growth was driven by a 3% increase in non-trade corporate loans, while trade loans and consumer loans remained relatively unchanged.

Deposits rose by 1% quarter-over-quarter in constant-currency terms. The NPL ratio remained steady at 1.1%, with specific provisions (SP) remaining low at 10 basis points. Allowance coverage stood at 125%, and increased to 223% when considering collateral. The Common Equity Tier 1 (CET-1) ratio was at 14.7%, the Liquidity Coverage Ratio (LCR) at 144%, and the Net Stable Funding Ratio (NSFR) at 116%.

In Q1 2024, the company's EPS reached 4.15SGD, the highest level in the past two years.

Looking ahead, the moderate loan growth observed in 2022 and 2023 is unlikely to see a significant recovery in 2024. High borrowing costs and global macroeconomic uncertainties have reduced the demand for credit. Stricter lending standards imposed by regulators will also slow the growth of mortgage business.

DBS Bank expects the Group NIM to further decelerate in 2024, falling below the level of the fourth quarter of 2023 (2.14% in the first quarter of 2024). However, DBS's extensive regional presence, diversified revenue streams, and robust balance sheet position it well to handle global macroeconomic challenges.

The integration of Citi's Taiwan consumer business with DBS Taiwan enhances DBS's market position, making it the leader in credit card balance, assets under management, loan book, and deposits in Taiwan. Earnings and ROE are expected to improve in 2024, driven by stronger net new money inflows, a more stable capital market, and increased credit card spending. Despite slower topline growth and cost inflation, the cost-to-income ratio is projected to remain in the low 40% range in 2024, supported by the high-return business from Citigroup Taiwan.

The company's current TTM P/E ratio is 8.92x. Since the beginning of 2024, the company's stock has risen by 21.93%, outperforming the FTSE Straits Times Index's gain of 3.12%. Despite the stock's strong performance, the current valuation remains reasonable, and the company's excellent business performance continues to support its fundamentals.

After releasing Q1 2024 earnings, UBS adjusted its 2024-2025 EPS estimates upward by 0-5%, citing higher net interest margins and wealth management fees. The updated DDM-based target price stands at S$39(previously S$39.1), implying a FY24E P/B of 1.75x. DBS, currently trading at 1.55x forward P/B, remains UBS's top pick in the sector with a sustained "Buy" rating.

The company's current TTM dividend yield is 4.87%, which is relatively high compared to the Singapore 10-year government bond yield. The company has a history of stable dividend payouts, with the latest 1Q dividend at 54 cents per share, the highest in nearly two years, indicating the company's willingness to distribute profits.

In summary, the company's strong profitability in the first quarter of 2024 has boosted its stock price. The company demonstrates strong growth potential through effective risk management and robust profitability in the current high-interest-rate environment. Reasonable valuation levels and stable, substantial shareholder returns also suggest further upside potential for the stock. Investors should closely monitor macro interest rate changes.