Analysts maintain &lsquo hold&rsquo call on counter on FY2025 positive outlook, despite modest Q4 earnings estimates

 

DBS may declare a special dividend of S$0.50 a share for the fourth quarter of FY2024 as well as raise its ordinary dividend per share to S$0.60, said CGS International in a report on Tuesday (Jan 14). 

 

Reiterating its &ldquo hold&rdquo call on the bank, the securities company maintained its target price at S$43, which is 1.1 per cent below its latest closing price of S$43.50 for Wednesday. 

 

This comes as CGS International analysts Andrea Choong and Lim Siew Khee predict &ldquo modest earnings&rdquo for DBS in Q4 FY2024 amid softer business activity across Singapore banks during the year-end season. 

 

&ldquo We believe Q4 FY2024 earnings were seasonally softer across Singapore banks as business activity decreased amid heightened leisure travel and year-end festivities,&rdquo said Choong and Lim in a Monday (Jan 13) report. 

 

However, they maintain a &ldquo hold&rdquo call on DBS as they are optimistic about its FY2025 outlook, citing upside risks of stronger treasury income and wealth management fees. &ldquo We believe investors have priced in the positive outlook for net interest margin (NIM) and wealth management in FY2025,&rdquo they noted. 

 

Modest profit

With the trio of Singapore banks &ndash DBS, UOB, and OCBC &ndash set to declare final dividends in Q4 FY2024, Choong and Lim think that DBS will raise its ordinary dividend to S$0.60 a share from the quarter onwards. 

&ldquo DBS estimates S$6 billion in transitory excess capital S$2 billion will be used redeem its additional tier-1 capital securities, with the rest available for shareholder return,&rdquo they explained. 

 

Choong and Lim said that DBS will turn a modest net profit of S$2.7 billion for Q4 FY2024 &ndash an 11 per cent quarter-on-quarter (qoq) decline and a 13 per cent year-on-year improvement.

 

&ldquo While we see some benefit from the stronger US dollar in Q4 FY2024, overall loan growth should have stayed soft amid sluggish corporate demand,&rdquo they said. The full year&rsquo s loan growth will likely come in at the bank&rsquo s guided low-single digit range, they added. 

 

In line with &ldquo dampened&rdquo fee momentum, wealth management income is anticipated to retreat despite showing strong momentum in preceding quarters, said Choong and Lim. This comes as the segment is likely to record slower earnings for the quarter due to &ldquo seasonal factors&rdquo , they felt. 

 

In the same vein, softer treasury income is to be expected. 

 

However, net interest margin (NIM) for the quarter is expected to remain relatively stable and record qoq growth, said Choong and Lim. &ldquo We think NIM stayed rather stable in Q4 FY2024 despite the 50 basis point US Fed rate cut in November and December, as its effects may be more noticeable only in Q1 to Q2 FY2025 when it takes effect in both asset yields and funding costs,&rdquo they pointed out. 

 

With the bank&rsquo s exit NIM of 2.15 per cent for Q3 FY2024 &ndash which stands above its NIM of 2.11 per cent for the quarter &ndash sustaining into October 2024, they predict that NIM for Q4 will lift from the previous quarter to 2.13 per cent. 

 

Credit costs are estimated to be &ldquo benign&rdquo in line with the bank&rsquo s FY2024 guidance, they added. 

 

Given that DBS has a fixed-rate asset book of S$190 billion, of which S$50 billion will mature in FY2025, the bank can expect to see some &ldquo yield pick up&rdquo in the quarters to come, Choong and Lim said.

Investment management firm Vertical Theme Sdn Bhd is planning to seek approval in the coming weeks to start talks about selling its stake in Alliance Bank Malaysia Bhd (KL:ABMB), according to people familiar with the development.

Vertical Theme, a Malaysian holding company, is considering selling its roughly 29% stake in Alliance Bank to Singapore&rsquo s biggest lender, DBS Group Holdings Ltd, the people said, asking not to be identified because the deliberations are private.

Under local rules, Vertical Theme needs to submit an application to Malaysia&rsquo s central bank to start any talks. If a deal goes through, DBS may consider raising its stake in Alliance Bank to up to 49% via a voluntary partial general offer, the people said.

A deal for Alliance Bank would give DBS a foothold in Malaysia, where Singaporean rivals Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank Ltd (UOB) already have an established presence.

SINGAPORE &ndash Outgoing DBS Bank chief executive officer Piyush Gupta expects the US to remain as a global growth engine but warns of three potential headwinds that could lead to a market correction.

 

Mr Gupta, who joined the Singapore bank in 2009 from Citibank, will be passing the reins to Ms Tan Su Shan, the group&rsquo s head of institutional banking, at DBS&rsquo annual general meeting on March 28.

 

During his tenure, DBS began its digital transformation, a journey that propelled the bank&rsquo s earnings, and eventually its market value beyond $120 billion &ndash a feat unrivalled here.

 

Mr Gupta delivered his last opening address on Jan 13 at the DBS Private Bank Market Outlook for the first quarter of 2025.

 

He said: &ldquo The biggest source of strength in the global economy comes from the US. Retail sales have been holding up... Inflation is high, but payroll data is high and jobs are being created.&rdquo

 

He reckoned the base case of assuming a soft landing is still pretty much intact. A soft landing would mean the US Federal Reserve has accomplished the difficult task of taming inflation without triggering a recession.

 

While the market now assumes no more interest rate cuts by the Fed, Mr Gupta expects to see &ldquo a couple of rate cuts at least&rdquo .  

 

Uncertainties related to US policy loom large. If President-elect Donald Trump&rsquo s administration implements targeted tariffs and modest fiscal easing, the overall impact could provide a tailwind for US growth. If so, it makes sense for investors to buy US equities even though they are expensive, as earnings are coming through, Mr Gupta added.

 

But the tail risks cannot be ignored, he said.

 

One of these is potential instability in the financial markets.  

 

In the US, consumer loan delinquencies have crept up.

 

Total household debt in the US increased by US$147 billion (S$201 billion) from the second quarter of 2024 to a record high of US$17.94 trillion the following quarter, data from the Federal Reserve Bank of New York showed. Mortgages made up 70 per cent of the US$17.94 trillion. Credit card and auto loan delinquency rates have also increased sharply.

 

&ldquo The free float and availability of US dollars is beginning to shrink,&rdquo Mr Gupta said. 

 

A stronger US dollar means headwinds for most emerging markets as they face a rising cost of external debt paid in the greenback.

 

&ldquo Put all these together &ndash delinquency in the system, high valuations, tighter liquidity, fewer dollars in the system... it is not impossible to see some market corrections,&rdquo Mr Gupta said.

 

He added that this instability in the financial markets could spill over into the broader economy, fuelling uncertainty and insecurity.

 

There are also risks associated with more extreme trade policies hitting emerging markets and export-oriented Asia. Slower growth in these regions will impact the US, Mr Gupta said.

 

The US government debt to gross domestic product (GDP), at around 120 per cent, is creating anxiety, he added. The cost of debt could hurt markets. 

 

&ldquo So I think the US should do generally well, but I still see a lot of choppiness, a lot of volatility,&rdquo Mr Gupta said. 

 

Investors may want to be a little defensive and diversify their portfolio beyond the US and into emerging markets and gold.

 

Asia outlook

 

On China, Mr Gupta noted that there had been many policy measures to boost growth, but the mainland faces a fundamental challenge &ndash the lack of market confidence.

 

&ldquo As a consequence, they are finding it very hard to turn the ship,&rdquo he said.

 

While some sectors in China could see an improvement, others like its electric vehicle market, where there are more than 100 electric vehicle manufacturers, could see some value destruction. 

 

Growth in India is expected to slow to 6 per cent to 6.5 per cent in the fiscal year ending in March 2025, down from 8.2 per cent growth in the previous year. 

 

The outlook for South-east Asia is mixed, with Singapore witnessing broad-based growth. The Ministry of Trade and Industry has forecast that the country&rsquo s real GDP growth will range from 1 per cent to 3 per cent in 2025, down from 4 per cent in 2024.

 

Malaysia is likely to remain strong, with analysts projecting a GDP growth of at least 5 per cent, driven by foreign investments. 

 

Indonesia&rsquo s outlook is uncertain, though long-term growth is projected at around 5 per cent, Mr Gupta said. 

 

DBS chief investment officer Hou Wey Fook said the bank&rsquo s flagship barbell strategy returned 15.6 per cent for the year as at Dec 4, 2024. 

 

The bank continues to rate US equities and technology stocks as &ldquo overweight&rdquo on the back of Trump&rsquo s pro-business stance and the growing adoption of artificial intelligence. 

 

Mr Hou also advocates &ldquo overweight&rdquo on fixed income as it provides downside protection should trade tensions escalate.

 

He suggested holding some assets such as gold and hedge funds to enhance a portfolio&rsquo s overall resilience.

CGS International analysts Andrea Choong and Lim Siew Khee have kept their &ldquo hold&rdquo call on DBS Group Holdings with an unchanged target price of $43 ahead of the bank&rsquo s earnings for the 4QFY2024 ended Dec 31, 2024. The bank will release its results for the 4QFY2024 and FY2024 on the morning of Feb 10.

 

&ldquo We expect DBS to post 4QFY2024 net profit of $2.7 billion,&rdquo write Choong and Lim in their Jan 13 report. The analysts&rsquo estimate represents a 11% q-o-q drop but an increase of 13% on a y-o-y basis.

 

They add that overall loan growth is likely to have stayed soft due to &ldquo sluggish&rdquo corporate demand although this is slightly offset by the stronger US dollar (USD) in the 4QFY2024. The analysts expect DBS&rsquo s loans to grow by 0.5% q-o-q. In tandem, they believe that DBS&rsquo s loan growth for the FY2024 likely came in within the bank&rsquo s estimates within the low-single digit range.

 

In the 4QFY2024, Choong and Lim have estimated DBS&rsquo s net interest margin (NIM) to be at 2.13%, 2 basis points (bps) higher q-o-q. Their estimate is based on the bank&rsquo s exit NIM of 2.15% in the 3QFY2024, above its quarterly NIM of 2.11%, sustaining into October 2024. &ldquo [This is] due to less accounting asymmetry on how interest income is booked.&rdquo

 

In addition, DBS has a fixed-rate asset book of some $190 billion, of which $50 billion is said to be maturing in FY2025. This may attract some yield pick-up in the quarters to come, the analysts note.

 

On wealth, even though the bank displayed strong wealth management momentum in its previous quarters, the analysts expect seasonal factors to slow earnings in the segment.

 

In line with this, the analysts are expecting DBS&rsquo s cost-to-income ratio (CIR) to increase to 42% in the 4QFY2024, but remain within the bank&rsquo s guidance of 40% for the full year.

 

&ldquo We believe credit costs were benign at 11 bps in 4QFY2024,&rdquo they write.

 

All three banks are likely to have seen a seasonally softer set of earnings for the 4QFY2024 due to lower business activity and higher leisure travel and year-end festivities, the analysts note.

 

&ldquo Broadly, we think NIM stayed rather stable in 4QFY2024 despite the 50 bps US Fed Funds rate cut in November [and] December 2024 as its effects may be more noticeable only in 1QFY2025 - 2QFY2025 when it takes effect in both asset yields and funding costs,&rdquo they write.

 

All three Singapore banks also said they will declare final dividends in the 4QFY2024. With this, Choong and Lim expect DBS to raise its ordinary dividend per share (DPS) to 60 cents from 4QFY2024 onwards. &ldquo DBS estimates $6 billion in transitory excess capital (due to Basel III reforms) $2 billion will be used redeem its additional tier-1 capital securities, with the rest available for shareholder return.&rdquo

 

To this end, Choong and Lim say they remain neutral on DBS as they believe investors have &ldquo priced in the positive outlook for NIM and wealth management in FY2025.&rdquo

 

Their target price of $43 represents a downside of 2.6% to DBS&rsquo s share price of $44.13 as at Jan 10 and around 2.05% lower than the bank&rsquo s closing share price of $43.90 as at Jan 15.