DBS Q4 profit up 37%; loans and CASA at record levels ahead of Fed hikes

DBS D05 sees itself in a strong position heading into a year of impending rate hikes, with loan growth and CASA (current account and savings account) ratios at their highest levels and asset quality improving as economies continue to rebound.

On Monday (Feb 14), the lender reported a net profit of S$1.4 billion for the fourth quarter ended Dec 31, 2021, up 37 per cent from a year ago on higher fee income and lower allowances.

Full-year net profit jumped 44 per cent to a record S$6.8 billion, though slightly below the S$6.9 billion estimate from analysts polled by Bloomberg.

Return on equity also increased from 9.1 per cent to 12.5 per cent.

Calling it the best performance in the last decade, DBS chief Piyush Gupta said the bank was able to deliver record profits last year despite the collapse in interest rates that had wiped out some S$3 billion in net interest income (NII) since the pandemic hit.

With the Federal Reserve expected to kick off an aggressive tightening cycle starting March, the lender has guided for an upside of S$1.8-2 billion to NII for every 100 bps rise in interest rates.

Assuming 4 rate hikes in 2022, one per quarter, such a base case could fetch an end-2022 net interest margin of 1.6 per cent, up from 1.43 per cent.

In 2021, the bank's full-year loan growth of 9 per cent to S$409 billion was the highest in 7 years, mitigating some impact from interest rate cuts.

"The commercial book will benefit quite substantially as rates go up. But perhaps more important is that deposit growth has been spectacular," Gupta told media at a briefing.

Notably, CASA rose 12 per cent year on year to S$381 billion in 2021, propping CASA ratios up from the "high 50s" to a record 76 per cent.

"We're going into a rising interest rate environment. The structural shift in our CASA ratio is going to be extremely beneficial for us in the coming period," said Gupta.

Addressing uncertainty over the Fed's new rate hike cycle, he told media it is unlikely for "massive increases" in interest rates driving economies into recession.

"Even if there were 7 to 8 hikes, that would take rates up to about 2 per cent which is still (manageable). If the central banks find that inflation is too sticky and rates get back to 3-4 per cent then that's another story, but that's not our base case," he said.

The board raised Q4 dividend to S$0.36 per share - up from S$0.33 a quarter ago - subject to shareholder approval. Taken with interim dividends paid over the financial year, annualised dividend payout totaled to S$1.44 per share, 9 per cent higher from the year before.

Gupta said there was sufficient capital to return more dividends to shareholders, but payouts were moderated down due to the Monetary Authority of Singapore's latest capital requirement imposed on the bank.

The regulator had on Feb 7 ordered DBS to set aside S$930 million more in regulatory capital as penalty for its multiple-day digital banking outage last November.

It will be "out of place" for the bank to speculate when the capital requirement will be lifted, said Gupta. Though for reference, MAS took about 14 months to reverse a similar charge a decade ago.

Meanwhile, there will be no impact on any investment and hiring plans, Gupta added in response to queries.

DBS's asset quality continues to improve on higher repayments last year.

Non-performing assets (NPAs) in Q4 declined 11 per cent quarter on quarter from full repayments of 2 significant exposures, while non-performing loan ratio fell from 1.5 per cent to 1.3 per cent over the same period.

Total allowances came in at S$33 million in Q4, significantly lower than the S$577 million in the year-ago period.

There was a full-year general provision write-back of S$477 million, with special provisions accounting for 12 bps of loans - below pre-pandemic levels.

DBS expects the benign asset quality environment to continue into 2022, with loan loss provisions in the range of S$0-100 million.

Still, general allowance overlays were maintained and allowance reserves continued to be high, with NPA coverage at 116 per cent and 214 per cent if collateral was considered.

"I don't think anybody should assume we would ever release our entire management overlay. But I think it's fair to assume that as the economy opens, and as the virus situation falls behind us and China stabilises a bit, we do have the potential to release some of that," said Gupta.

Q4 net interest income inched up 1 per cent on-year to S$2.1 billion as the drag from low interest rates eased, while net fee and commission income gained 9 per cent to S$815 million largely on stronger wealth management and transaction services.

For the full year, fee income climbed 15 per cent to a record S$4.1 billion to partially offset the 7 per cent decline in net interest income.

Common Equity Tier-1 ratio grew from 13.9 per cent to 14.4 per cent as profit accretion outpaced risk-weighted asset growth.

DBS expects business momentum to remain healthy amid moderation in economic recovery.

It projects mid-single-digit loan growth or better, as well as double-digit fee income growth, although it cautioned potential risks from the US market sell-off and slowdowns in China.

"If China continues to keep the domestic economy controlled in terms of mobility, that might have some impact on consumption expenditure. So...a little bit of uncertainty. But despite that, our pipelines are looking good," said Gupta.

As part of regional expansion efforts, DBS's recent deals with Lakshmi Vilas Bank, Shenzhen Rural Commercial Bank, and Citi's consumer assets in Taiwan are expected to collectively contribute around S$1.3 billion to its top line and S$500 million to its bottom line.

"They're going to be quite material in terms of accelerating our growth trajectory," said Gupta.

DBS shares fell 0.1 per cent or S$0.05 to close at S$37.20 on Monday evening.

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