Takeaways from DBS 4Q results: Increase in ordinary dividend and bonus share issue take the limelight

Broad Overview

Being the first local bank to release their results, DBS has set the stage for Singapore banks earnings. Total 4Q net income was up 9% year-on-year, while net profit (excluding one-off item) came in at a 2% year-on-year increase to $2.39 billion, which is in line with analyst estimates.

The overall results continue to show that earnings momentum has peaked, with year-on-year profit growth softening over the past two quarters. That said, there is room for comfort in that the tapering in momentum has been somewhat resilient compared to consensus.

Net interest income growth continues to moderate

As the narrative for rate outlook takes on a different course from last year, investors’ focus are on how quickly the banks’ net interest margin will moderate. That has played out in DBS 4Q results, which revealed that its net interest margin has eased to 2.13% from previous 2.19%, marking the first decline in margin since September 2021.

With that, its 4Q net interest income was brought to a 4.7% year-on-year growth, with the low single-digit growth potentially set to stay over the coming quarters. The management guided for FY24 net interest income to be around 2023 levels, which suggests room for year-on-year growth to taper further. With the peak of the interest rate upcycle behind us, its FY2024 net interest margins is also guided to be slightly below 2023 exit margin of 2.13% as the tailwind from the higher rate environment continues to unwind.

On another front, lending activities in 4Q 2023 remains stable, up 0.5% from a year ago. Expectations that the global interest rate cycle has peaked, along with resilient economic conditions validating soft landing hopes, may have helped to stabilise loan demand but a more concrete recovery is yet to be seen.

Recovery in non-interest income provide some cushion over coming quarters

With the growth in net interest income cooling, eyes are turned to any recovery in its non-interest portion, particularly the fee income, to help cushion any earnings impact. That has continued to deliver, with DBS 4Q non-interest income continuing its broad-based recovery from 3Q on a year-on-year basis (+20.1%).

Improvement in market conditions amid a risk-on environment in 4Q may have translated to some support for wealth management activities, while the usual resilient card fees continue to work its charm. The bank’s outlook suggest room for further build-up in growth momentum, with guidance for 2024 fee income to be in the double-digit and that may limit the softening impact in overall earnings over coming quarters.

Loan loss provisions stable, capital position strong

In terms of loan loss allowances, the bank has exercised its usual prudence to cater for any economic uncertainty but with the improved environment, the 4Q build-up from DBS has decreased from the previous quarter ($142mn versus previous $215mn).

Overall, the bank remains well-positioned to weather any downturn with its strong balance sheet. DBS common Equity Tier 1 (CET1) capital ratio has improved to 14.6% in 4Q, which is ahead of its minimum regulatory requirement and provides a strong capital buffer to weather any downturn. Asset quality has also been healthy, with loan-performing ratio at 1.1%.

Increase in ordinary dividends may provide some reassurances for longer-term prospects

In replacement for the one-off special 50-cents dividend last year, DBS has raised its ordinary dividend to 54 cents in 4Q, up from the previous 48 cents. This marked the second increase in dividend over the past one year, and given the strong balance sheet and capital position, the bank’s move to increase ordinary dividends may signal some confidence for their longer-term prospects.

Apart from the dividend increase, there is also a 10:1 bonus share distribution. For every 10 shares held, investors will be given one bonus share, hence overall providing a forward dividend yield of 7.5%. This level of dividend yield has towered above its rivals, namely UOB and OCBC of around 6%, leaving expectations in place for its peers to follow in its footstep as well to raise longer-term returns for shareholders.

Valuation

In terms of valuation, DBS remains the priciest among the three Singapore banks, from both a price-to-book and forward price-to-earnings perspective. But this can be somewhat justifiable by its profitability and operational efficiency, with DBS carrying the highest return on equity among the trio.

Management to take pay cut as a result of previous digital disruptions

As a result of the digital banking outages last year, the variable pay for DBS group management committee is announced to be collectively cut by 21% from a year earlier, which includes a deeper 30% reduction for Chief Executive Officer Piyush Gupta.

This may be well-received by investors, with the heavy-punishing move highlights the management’s commitment to minimise future disruptions. The cuts may also help to offset some of the higher compliance costs, higher operational costs and costs set aside to enhance system resiliency, and limit its overall impact on their earnings.

Technical Analysis: Broader wedge pattern in focus

DBS share price has been trading within a broader wedge pattern since July 2022, marked by a series of higher lows but lower highs. Today’s results have triggered a 2.6% upmove in share price at the time of writing, with buyers potentially seeking to retest the upper wedge trendline resistance at the S$33.00 level ahead. On the downside, immediate resistance at the $32.36 has been overcome for now, while greater support may be found at the $31.60 level, where the lower wedge trendline support may stand. Any breakout of the wedge pattern will be on watch ahead to provide greater cues of longer-term direction.