DBS's weak Q2 showing may be cycle's bottom for bank: Citi

CITI Research expects DBS to report a "cycle-low" return on equity (ROE) of 7.5 per cent in Q2, with the projected weak earnings likely the worst of it in a season that has been seriously rattled by a health crisis.

Singapore's largest lender is Citi's top sector pick, though Citi cautioned that a reported ROE of 7.5 per cent in Q2, down from 9.2 per cent in Q1, may put pressure on DBS's shares. The counter has rallied to 1.1 times on a price-to-book basis, outperforming its local banking peers.

"We expect weak results - an impact of the April to May lockdown - and view this to be the quarterly earnings trough," said Citi analyst Robert Kong in a report on Tuesday.

Citi is expecting DBS's Q2 net profit to come in at S$1 billion, down 37 per cent year-on-year and 13 per cent from the previous quarter.

Q2 net interest margin (NIM) is expected to fall by 21 basis points (bps) to 1.65 per cent, with benchmark interest rates down some 90 bps on a quarterly basis. If the post-global financial crisis NIM of 1.6 per cent is breached, there could be further downside risks to earnings, said Mr Kong.

The bank's wealth management fees make up 36 per cent of its total fees, with credit card and transaction fees amounting to 43 per of total fees. Amid lockdown measures, such fees earned by banks will be hit, said Citi. This is even with a likely cushion from treasury flows and mark-to-market bond gains. Flat costs are also expected to mitigate a large fall in revenue.

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Citi is projecting for DBS's Q2 provisions to amount to S$625 million, compared with S$1.1 billion in Q1.

"DBS was ahead of its peers in Q1 in taking S$1.1 billion in credit costs, and we hope DBS continues to front-load provisions to pave the way for a stronger 2021 ROE recovery."

The bank's Q2 results are due on Aug 6. Shares of DBS gained on Wednesday, trading at S$21.90, up 42 cents, as at 2.05pm.