DBS sets pace for peers as record Q1 profit shrugs off Covid-19 pain

D05 on Friday showed the blistering pace at which Singapore banks have recovered from the pains felt during the global Covid-19 outbreak last year, as Singapore's largest bank cracked the S$2-billion mark in quarterly net profit.

The work-culture impact of the pandemic is changing its office-space requirements. The bank expects to cut its overall physical footprint by about 20 per cent as the bank moves towards a hybrid work model, with the bank's chief executive Piyush Gupta confirming that it has given up space in the financial centres of Singapore and Hong Kong.

Amid robust growth, DBS is still open to looking at assets that could be incremental to its franchise, including Citi's assets that are up for sale, said Mr Gupta.

"In countries where we do have a franchise, we will take a look at those assets," he said, adding that the sale process has not kicked off yet.

The bank on Friday morning posted a 72 per cent year-on-year (y-o-y) rise in Q1 net profit to S$2.01 billion, up from S$1.165 billion in the year-ago period.

It beat Refinitiv's estimate of S$1.43 billion. The earnings also beat the S$1.44 billion average estimate of six analysts polled by Bloomberg.

Credit costs also appear to be stabilising, resulting in a general allowance write-back of S$190 million and specific provisions back to pre-pandemic levels of S$200 million or 21 basis points. Total allowances for the full year are likely to be below S$1 billion.

Global banks have also shot past expectations in part on writebacks on bad-debt provisions. JPMorgan beat earnings estimates in Q1 with record gains, boosted by strong trading activity and a US$5.2 billion release of loan-loss reserves. US' largest bank posted a quarterly profit of US$14.3 billion, jumping from the year-ago quarterly profit of US$2.87 billion.

Citigroup analyst Robert Kong said he considers DBS's quarterly results a "huge beat" on double-digit growth in fees and low credit costs.

The brokerage has a "buy" call on DBS with a S$32.20 target price.

JPMorgan - which has an "overweight" rating on DBS and a S$33.00 price target - highlighted the stock as "one of its highest-conviction" buys with the latest Q1 financials confirming reasons for this optimism.

"Overall, we see DBS improving value creation across geographies, asset classes, business lines and technology frontiers. We see the bank consistently delivering best-in-class return on equity for the next few years, leading to highest multiple in at least last two decades," said JPMorgan in its report on Friday.

Other analysts covering DBS remain bullish on the lender's prospects, with Morgan Stanley maintaining "overweight" on the stock with a price target of S$28.40.

Mr Gupta believes that business momentum will remain strong, and the bank is subsequently upgrading its full-year loan growth to mid-to-high single digit. It is also expecting full-year fee income to grow at double digits, with wealth management likely to continue its upward trajectory.

Shares of DBS rose to a 52-week high on the results. DBS' counter closed at S$29.91, up 52 cents or 1.77 per cent, on Friday.

On the back of the bank's stellar results, Mr Gupta also laid out its plans for inorganic growth as part of the bank's push to emerge stronger after the pandemic.

With China's Greater Bay Area becoming an "increasingly important part of our franchise", its recent purchase of a 13 per cent- stake in Shenzhen Rural Commercial Bank is in line with that, he said. DBS bought that stake for 5,286 million yuan (S$1.08 billion), and is now the largest shareholder of the Chinese bank.

Mr Gupta pointed to Shenzhen Rural Commercial Bank's compound annual growth rate (CAGR) of 11 per cent for its net profit after tax in the last five years, with its high return-on-equity and strong capital adequacy. All these make it an "attractive economic investment in itself", he noted.

And as the bank grows, there is also a potential for it to do an initial public offering (IPO), which is an upside for DBS, added Mr Gupta. With the opening up of the financial sector in China where foreigners can now own 100 per cent of a local bank, he believes that there is an opportunity to increase DBS's stake in the bank.

The bank's stake in the Chinese bank came soon after its acquisition of India's Lakshmi Vilas Bank (LVB).

Mr Gupta said that LVB integration was "proceeding well", with deposits and loans up, and asset quality in line with expectations.

DBS has declared an interim dividend of 18 Singapore cents per share. This is lower than 33 Singapore cents (see amendment note) in interim dividend declared for the same period of 2020, but in line with the Monetary Authority of Singapore's guidance for local banks to moderate their dividends. It will be payable on or about June 25.

The scrip dividend scheme will apply, with the issue price for the new shares to be the average of DBS's closing share price on May 10 and 11.

The record first-quarter performance was partially thanks to sustained inflows into current and savings accounts as well as broad-based loan growth.

Net fee income increased 15 per cent from a year ago to a new high of S$953 million, with wealth management fees rising 24 per cent to a record S$519 million. Strong investor sentiment drove demand across a wide range of investment products in a low interest rate environment, said the bank.

Mr Gupta pointed out that the growth is partially driven by structural improvements in wealth offerings, with its push for the democratisation of wealth bearing fruit. DBS is seeing upside from the digital take up of its wealth products in the first quarter, where customers that use their digital platform to do so grew "substantially higher" than offline, he added.

Net interest income, however, fell 15 per cent y-o-y to S$2.11 billion from S$2.48 billion a year ago, due to lower interest rates.

Other non-interest income rose 12 per cent y-o-y to S$794 million, as trading income doubled on the back of new highs for both treasury markets non-interest income and treasury customer income.

Delinquencies remain low despite the tapering of loan moratoriums, and current asset quality trends are "encouraging" with stabilising asset quality, said Mr Gupta.

In Singapore, there is about S$400 million worth of loans under moratorium in DBS' SME book which will come off at the end of June, compared with S$5 billion at the start of 2020. He added that the bank is not seeing a pickup in delinquencies and cost of credit in SME loans.

There is also another S$5 billion worth of government-backed loans, but Mr Gupta said that the bank will only know in the second half of this year what delinquencies will look like.

Separately, out of the S$5 billion Singapore housing loans under moratorium at its peak, most have now resumed regular payments with only S$0.6 billion continuing under the extended moratorium scheme, he said. He added that mortgage delinquencies are low overall.

In Hong Kong, where the bank has "the biggest moratorium chunk", loans under moratorium are now down to S$2.8 billion, from S$6.5 billion in the middle of last year.

Out of the S$2.8 billion, a large part comes from corporates, but a few billion is from SMEs, he said.

The outlook in Hong Kong will be unclear for a longer period as the authorities there have extended the moratorium into 2022, and the bank will just have to keep an eye out, noted Mr Gupta.

"Nevertheless, when you put all of that together, it is quite clear that the delinquencies in all of these portfolios are not coming in at anywhere near the levels that we thought they might," he said. "There might be some upside on that."

During the briefing, Mr Gupta also updated on its Digital Exchange that was announced in December last year, with capabilities that he likens to Nasdaq-listed cryptocurrency exchange Coinbase.

The key difference is that Coinbase targets the retail segment, while DBS is starting with accredited investors and professional institutional counterparties, he said.

He said that the daily trading value has increased by more than 10 times since the launch, with close to 120 investors and digital assets under custody of more than S$80 million.

DBS will soon scale up this business in the coming quarters through the issuance of security tokens, as well as enable trading to take place around the clock.

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Amendment note: An earlier version of the article wrongly stated that DBS's interim dividend declared for Q1 2020 was 30 Singapore cents per share. It is in fact 33 Singapore cents per share. The article has been revised to reflect this.