How to Interpret DBS's 4Q Earnings Report?

On 07 Feb 2024, DBS Group announced a record-breaking year in 2023, with net profit surging 26% to SGD 10.3 billion and return on equity reaching a new high of 18.0%. Singaporean banks, including operations across Hong Kong, Indonesia, India, China, and Taiwan, are expected to report higher Q4 profits due to increased interest rates.

Total income grew 22%, exceeding SGD 20 billion for the first time, driven by a higher net interest margin, a rebound in fee income, and record treasury customer sales.

The bank's two primary revenue-generating segments are Consumer Banking and Wealth Management. Both the Consumer Banking/Wealth Management and Institutional Banking divisions have shown a direct positive relationship between their profitability and interest rates.

As interest rates rose, these core business units thrived through enhanced net interest margins, expanded service offerings tied to interest rates, and increased client activity, thereby contributing significantly to the overall earnings of the bank.

The Consumer Banking and Wealth Management segment experienced a robust 35% year-on-year increase in full-year income to SGD 8.96 billion, attributed to the benefits of rising interest rates, augmented sales of wealth management products, and escalating card fees. Notably, Wealth Management income reached an all-time high, with Assets Under Management (AUM) surging by 23% to a new record level of SGD 365 billion. This substantial growth was underpinned by strong net new money inflows as well as the consolidation of Citi Taiwan's operations into the group.

In the Institutional Banking domain, income grew impressively by 22% to SGD 9.36 billion. A significant driver of this surge was the 73% rise in cash management income resulting from the higher interest rate environment. Furthermore, there were notable increases in treasury customer flows and loan-related fee income during the period.

However, it is noteworthy that the Treasury Markets division experienced a significant setback, recording a 38% decrease in total income to SGD 725 million for the fiscal year. This downturn was primarily attributed to the escalation of funding costs, which had an adverse effect on the segment's overall performance during this period.

The Board proposed a final dividend of 54 cents per share for the fourth quarter, an increase of six cents from the previous payout. This brings the ordinary dividend for the financial full year to SGD 1.92 per share, an increase of 42 cents from the previous year.

In addition, the Board proposed a bonus issue on the basis of one bonus share for every existing 10 ordinary shares held. The bonus shares will qualify for dividends starting with the first-quarter 2024 interim dividend and will increase the pace of capital returns to shareholders.

DBS projects a 24% dividend hike to SGD 2.16 per share for the enlarged shareholder base, up from SGD 1.92 in FY2023. Based on the 6 February 2024 closing price, this implies a post-bonus annualized yield of 7.5%. No unforeseen circumstances assumed.

Singapore bank earnings growth has peaked as major central banks shift to rate cuts, impacting interest income and wealth management businesses amid market volatility. This downturn signals a slowdown in the sector's growth momentum.

Federal Reserve Chair Jerome Powell said on Wednesday that interest rates had peaked and would move lower in the coming months. In Southeast Asia, Indonesia's central bank said this week it had room to lower interest rates this year to lift growth.

The average target price derived from 18 analysts currently stands at SGD 36.78, with the most optimistic projection reaching SGD 43.14, reflecting a premium of approximately 14% over the current market price. Among these analysts, half (50%) have issued a 'Buy' recommendation, while a third (33.3%) have assigned a 'Hold' rating to the stock.