DBS Aims For S$10 Billion Profit in 2023. Is the Target Achievable?

What happened? 

DBS reported a record profit of S$8.19b for FY22. 

It also proposed a higher core dividend of 42 cents and special dividend of 50 cents. This brings its full-year dividend to S$2 per share.

During the results briefing, DBS management shared that there is potential for the company to earn S$10 billion of net profit in 2023. 

However, its share price came down following the results on 13 January. 

Let’s dive deeper into the results to see what might be driving the share price weakness, and if the S$10 billion target may be achievable. 

Why did DBS share price fall following its 4Q22 results

There were a few developments from DBS’ fourth quarter results that paint a less rosy picture.

#1 Full-year loans growth was lacklustre at 4%.

In fact, gross loans shrank 3.4% in 4Q22 qoq. Borrowers chose to repay loans earlier as lending rates climbed. 

Management has guided for a muted mid-single-digit growth in loans for FY23.

#2 Approaching peak net interest margins.

Net interest margin was higher at 2.05% in 4Q22. 

However, management lowered its peak margin guidance of 2.25% by 5-7 basis points, to 2.08%-2.10%. This suggests it is expecting funding costs to rise faster than lending rates. 

With current margins nearing the peak guidance, net interest income could be cresting soon, or even decline, if loans growth cannot compensate.

#3 Income from Investment banking, wealth management and trading fell in 4Q.

Weak equity and debt markets affected fee and commission income from wealth management and trading operations. 

Management expects a strong pickup in 2023, but we are less optimistic. 

Spikes in interest rates had affected equity and debt capital deals in the pipeline. These may only get revived when interest rates stabilize. 

All in, operating profit before credit provisions was 1.5% lower in 4Q22 qoq.

What are the bright spots from DBS 4Q22 results? 

Silver lining #1: Asset quality is healthy.

DBS wrote back general provisions in 4Q22, while non-performing loans improved further to 1.1%. This points to improving asset quality. 

FY22 credit costs were only 6 basis points. Management guided for still-benign credit costs of 10-15 bps for FY23, while suggesting 10 bps was within reach.

Silver lining #2: Potential for second round of special dividends.

Assuming the Fed does not cut rates in 2023, and asset quality is stable, DBS could still achieve an ROE of 15% and sustain its dividend payout.

When Basel IV rules kick in from 2024, ROEs for the local banks could also rise further. 

This could lead to another round of special or higher dividends.

What would Beansprout do?

Overall, the market does not seem to believe that DBS would be able to achieve a S$10 billion profit in 2023. 

Its share price appears to be to be weighed down by a few concerns, including:

• DBS may be approaching peak earnings, now that net interest margins are peaking. 
• The general economic slowdown may affect borrowers’ ability to repay debt even if there is no stress on asset quality currently
• Investors could begin to expect interest rate cuts, which would mean lower interest income and earnings forecasts for DBS going forward. 

DBS currently trades at a price-to-book ratio of 1.6x. This is still below is historical peak price-to-book ratio of 2x.

Find out what could drive DBS' stock price higher in Beansprout’s stock analysis tool. 

Related links

• DBS Share Price
• DBS Analysis
• DBS Dividends

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