Takeaways from DBS 3Q results: Resilience in net interest income and fee income provided a positive surprise

Broad overview

The 3Q results from DBS saw its net revenue increase 15.6% year-on-year to $5.19 billion, up from previous $4.49 billion. Its 3Q net profit outperformed expectations, with a 17.8% year-on-year growth to $2.63 billion versus the $2.54 billion estimated.

Stable net interest margin (NIM) helped to offset still-subdued loan demand, which translated to resilience in its net interest income (+16.0% YoY). Similar to UOB, net fee income held up as well, riding on higher wealth management fees (+22% YoY) and higher card spending (+21% YoY).

On the other hand, the safeguarding for tougher economic conditions continue, with a further build-up in loan loss provisions (+20.8% YoY). This comes in line with the bank’s guidance that uncertainty from macroeconomic slowdown and geopolitical risks will remain on the radar in 2024. Nevertheless, the bank guidance also displayed confidence, guiding for 2024 net profit to be maintained around record 2023 levels.

Resilience in net interest income, net fee income provided a positive surprise

Compared to UOB’s 3Q results, which has seen its third straight quarter of decline in its NIM, DBS seems to paint a different story. Its NIM showed little signs of reversing just yet, improving to 2.19% in 3Q versus the previous 2.16%, as asset repricing continues to outpace the rise in funding costs.

While expectations are broadly in place that the global interest rate upcycle may be at or near its peak, central banks continue to back their hawkish stance with rates to stay elevated for longer. DBS seems to provide some reassurances that it sees the higher-for-longer interest rates as a net benefit to its earnings into 2024, suggesting that its net interest income may continue to stay supported and do the heavy-lifting for its results.

This provides some much-needed comfort, at a time where loan demand continues to soften. Amid the uncertain economic environment, businesses have been cautious on their growth expansion plans, while slight signs of buyers’ fatigue emerge in the property sector following three rounds of property cooling measures and higher interest rates.

To top it off, its net fee income also surprised on the upside, increasing 9.3% from the previous year to S$843 million. A 22% increase in wealth management fees and 21% increase in card fees continue to reveal strong demand for investment products and higher consumer spending, which provided an added boost to its overall results.

Economic risks remain on the radar but well-positioned to weather any downturn

The risks continue to revolve around softer economic growth prospects, with rising asset quality risks likely to be brought into question if economic conditions worsen. Nevertheless, the Singapore banks have been prudent in unwinding previous loan loss provisions from the Covid-19 period and have also moved to set aside more allowances in recent quarters to safeguard against future financial risks.

Its 3Q results showed that its Common Equity Tier 1 (CET1) capital ratio remains unchanged at 14.1%, which is ahead of its minimum regulatory requirement and provides a strong capital buffer to weather any downturn. Thus far, asset quality has been resilient with its non-performing loan ratio at 1.2%.

Longer-term, the Singapore banks remain in a sweet spot to tap on growth opportunities across the region, having moved to step up on their offshore expansion plans in recent years and that is likely to continue over the long run.

Potential short-lived impact of MAS regulatory action

Given the Monetary Authority of Singapore (MAS)’s recent regulatory action on DBS for its digital disruptions, the bank expect to ‘deliver improved service availability and quicker service recovery as it progresses’.

The immediate impact may be higher compliance costs, higher operational costs and costs set aside to enhance system resiliency, but the scale of cost increase should not make too much of a dent on their earnings. The ban on acquisition plans is not long-lasting as well, and DBS is likely to be focusing on integrating previous acquisitions rather than seeking out new opportunities at current point in time.

The MAS messaging is likely not to cause pain on DBS business, but to serve as a warning to all financial institutions on the importance of their system reliability.

Valuation/Dividend

Based on a price-to-book valuation, DBS seems to be least cheap out of all three local banks. Its dividend yield also stands at 5.0%, the lowest out of all three banks, but investors may attribute a premium to its earnings resilience and growth prospects.

Technical Analysis

The share price movement for DBS remains in broad consolidation lately, with investors still seeking for a strong catalyst to induce an upward break of its near-term ranging pattern. An attempt to hold above the Ichimoku cloud support on its daily chart may still reflect some defending from buyers for now, with one to watch for any successful break above the key resistance at the S$34.55 level (August and September 2023 peaks). A move above the S$34.55 level may potentially pave the way to retest the S$36.00 level next.