DBS Group Holdings Ltd (D05) Earnings Call Transcript & Summary

You want to go ahead, Hong Nam?

Yes, sure. Thank you. Good morning, everyone. Thank you for joining our analyst briefing with our CEO, Piyush; and our CFO, Sok Hui. As we've just had the slide presentations, we can go straight to Q&A. So operator, can we please have the first question?

[Operator Instructions] Our first question is from Aakash, UBS.

Apologies, I think some of this might have been discussed in the media briefing, but we were on a peer bank's call, so we couldn't get a lot of that. The first question I have is just on the outlook for credit costs for this year and next year? I mean, given a lot more uncertainty that we have today on the growth side and geopolitical risks and everything, can you -- do you think you still can go to a 0 sort of level this year -- close to 0 level for this year? And then what about next year in credit cost?

I addressed this in the media conference already? So if you think about the overall outlook, Ukraine and everything, I mean, that's how I think about the first order impact on us is de minimis. We really have nothing in Russia, Ukraine, et cetera. So it doesn't fundamentally change anything for us. The second order of impact, I think, comes through the commodity complex, oil, gas, energy prices, metals, minerals, food, et cetera. And -- so that could create a some interesting categories of you could have individual companies or corporations who are on the wrong side of some pricing bids or position. So that could create some vulnerability. But I call this idiosyncratic. You can't sort of model for that. You can only sort of go back and look at the whole portfolio and see if anybody is impacted at a point in time. I'll come back to that. And then the third order impact is really the macroeconomic flow through. And that is something theoretically you should be able to model, but it's not easy. That what happens if an invasion comes through, what is its impact on sales of companies? I mean volumes might come off, prices might go up. What is the pass-through they can do in their pricing? What it's impact on their margins, et cetera. There, you can sort of put something as the debt servicing is likely to go up because of interest rate increases and so on. So that's something we can model in time, take a look at what might happen over the course of the next couple of years. But it's not that easy to be able to put that in a model, especially since nobody has really seen a high inflation environment in the world for a period of time, if you will. On the -- the way we've been dealing with that is actually stress testing and doing bottoms up. So we've been doing a lot of stress test across each of the obviously industry clusters, food and agri, metals, mining, energy complex, et cetera. We're doing a lot of stress test around property, obviously. And we're doing a lot of stress test around some of the consumer goods and making -- trying to figure out what pass-through mechanisms there, how much margin squeeze there might be. Based on that, in the short term, which is, I think, I'm fairly confident for the course of this year. We are not seeing any material pickup in our cost of credit relative to what we normally assume, right? Our specific provisions, therefore. So in the past, I've said that we should not be looking at specific provision guidance for DBS somewhere between 15, 20 basis points stage. And we're not seeing that materially change on the back of all the stress testing that we've done. On the 0 allowances, that assume that you'll get SP number of around that level. And then because it built up so much general provision buffer in the last couple of years, we would start releasing the general provisions to match that SP requirement. So we come back to close to 0 like last year. Whether we release the general provision buffer, it's something we'll be a little bit more thoughtful about in the course of the year. It really depends on whether the situation has better line of sight or not. At the same time, we expect the interest rate uplift to give us some unexpected tailwind. So even if we decide to hang on to the general provision buffer for longer, whatever we sort of lose by not releasing it, I think we will more than make up for that through interest rates in the course of this year. Now when you look at the projection for next year, like I said, it's harder to model and figure what impact of that next year might be. Our portfolio, like I said, has been resilient. The biggest impact in our 2-year time frame is likely to be on the SME book. But our SME book has been in really well stress-tested over the last 2 years, mostly a secured book. And because all of these challenges are right from the supply chain from 2018/'19, we've gone through 3, 4 years of, I call it, trial by fire to the crucible. And so we've really built the book quite nicely, building and construction, retail, wholesale. So my anticipation, that book will stay quite robust. But we will have to make a better assessment of it as the year unfolds. The other big thing is, obviously, consumer finance. Again, we don't have a very large consumer finance book, unsecured consumer finance book. But -- and again, that's really the function of what happens to wages and what happens to debt servicing capability of the consumer. Again, something we'll get a better sense of towards the second half of the year when we're looking out for 2023. So because of those uncertainties and hard -- being difficult to model, the way -- our current inclination to deal with that is to be a little bit more careful before we release our GP buffer and allowances. We've got about $1.8 billion out of GP that we've built up outside of our models. And so we can be quite comfortable that our buffers are fairly solid.

Okay. Understood. The second question I have is on the trading gains. It particularly looks surprising when other banks are reporting weakness and losses on that front. So can you explain what the difference is with DBS versus other banks? And if you're able also mentioned that higher market volatility is likely to help on this going forward. Could you just help us explain that as well? How does that work?

Actually, I'm surprised -- I'm not sure what our peer banks reported. But if you look at the results of all the U.S. banks and the European banks, everybody had a very strong FICC quarter. So macro trading has done really well in this environment. And that's true for UBS, just reported some massive results mostly because of macro trading. So did all of the U.S. banks, very strong macro trading. And we saw the same thing, that all of our -- there's -- particularly the rates did really well, but solid FX, solid credit, equity, all of them did well. There's so much volatility in the market that if you position well into the volatility, you could make a reasonable money. Two things we are advantaged to have because we have built our flow business very nicely because for our digital distribution over the last 2, 3 years. So it is true that we sit on very good flows, and that gives us a greater advantage in terms of warehousing and for listing. But like I said, all of them also reported good results.

And so I think from the MTM perspective, it's probably -- like you've said, it usually flow through the OCI channel directly, and they don't impact the P&L numbers.

Well, that's correct. So the negatives that comes on the long bond book goes through the OCI channel, it doesn't come to the P&L. And again, you can see that on the numbers...

Hi. Sorry, there's a cross line coming through. Could you mute, please?

Yes. I was saying, the OCI impact, again, we can see in the numbers of all the global banks. That increase in interest rates means that your long-bond position in your investment don't get marked down, and -- but that goes directly to equity. If you look at our own numbers, you can see it in the reduction in our shareholder funds for the quarter, but that doesn't come to the P&L.

Okay. Cool. Great. The last question I have is on the staff cost pressure. I mean, you guys are seeing a lot more pressure than peers year-on-year. So I'm just wondering...

On what?

Staff cost pressure. Staff cost.

Yes.

So I'm just wondering, like, why is it more like DBS versus peers? What areas is this coming from? And keeping this in context, can you still meet your cost guidance, which is, I think, slightly higher compared to last year for the whole of this year?

Well, I haven't, again, looked at peers' staff cost. But I think you just want to check the market. Technology talent is very, very scarce across the region, particularly in Singapore. The turnover rates for tech attrition rates are high across every market. I think it's also been exacerbated by the Ukraine-Russia problem. Last time, they told me there was 300,000 engineers who are outside the market in Ukraine, another 1 billion in Belarus and Russia. So most of the big tech firms are busy hiring for tech talent in our part of the world. And so that is something that is flowing through everybody's number that I can see. But yes, when we give you a guidance for cost increase like last year, we've already factored to the fact that there is a flow-through impact of the wage increases we did last year as well as what we are likely to have to do this year as well.

So it's mainly technologies, what you're seeing, not wealth management or other products?

It's mostly the lift in technologies. It's broad-based. Started last year, was broad-based across the spectrum. But the turnover rates are the highest in tech, data, analytics in all of those sectors.

Our next question Harsh Modi from JPMorgan.

A couple of questions. One, Piyush, technicality on NIM of 18 to 20 bps -- or $18 million, $20 million per bp. How does the NIR affect it? Is this adjusted for the NIR slope changes?

Yes. So, Harsh, of course, if you look at our NIM impact, pretty much half of it comes from the dollar book, not the Sing dollar book. So that, of course, doesn't get impacted by the NIR or anything. That flows straight through. Today, about 94% of our dollar loan book is CASA funded. And there -- and it's mostly a floating rate book so that was bond upside flows straight to the bottom line. The other half of the impact, which comes from the Sing dollar book, obviously, that is impacted by the flow-through assumptions from U.S. dollar rates into to Sing dollar rates. And then if you look historically, when the Sing dollar is strengthening, the flow through tends to be lower. When the Sing dollar is weakening, the flow through tends to be higher. But on an average, if you look through cycles, you tend to get roughly a 60%-or-so flow through from U.S. into Sing dollars. And so when we build our model, we take a flow-through assumption of where we see the Sing dollar is going, where the Sing dollar will tightly weaken, and we build that into our model. We also build into a model the likelihood of our having to money outflow, paying up for liabilities, et cetera, et cetera. So we put all that in and we take a fairly conservative view for what that might be. And all of that has been through a model that put into the number that we indicated to you.

Okay. So then I should not -- so basically, my presumption here is that you would assume, let's say, 60% pass-through, let's say, that holds. So I should not then further slice the $18 million further down...

Yes, you should not. You should not. I've already done that in the numbers.

Awesome. Okay. Okay. That actually adds to what I was thinking number would be times that. The second thing, CET1, quite comfortable. What it would mean for payout ratios, buyback evolution over the rest of the year?

Well, what is 0.4% impact from that operations penalty, and I don't know how long ABS is going to keep that. I have -- the last time they're penalized, it took us over a year for them to reverse it. So I want to keep an eye on that and see how long -- I mean, we're on top of what needs to be done. But my own base case is that they'll keep their penalty phase for some period of time. So that's one thing I got to keep an eye out on. The second thing I have to keep an eye on is if rates continue to go up, then we'll get more impact on our OCI, if we saw, like everybody will, right? And so there'll be some pressure on capital that might come from that. So those are 2 things to keep an eye on. The third, yes, Sok Hui, please remind me. Go ahead.

Yes. So the third thing is our Citi transaction. So we expect to complete it sometime after the sort of June next year. So that will add another 0.7 percentage point impact.

So when you put all of that together, we sort of balance it with -- obviously, the capital efficiency we get from our P&L. Now obviously, rates go up, we'll need a lot more money. So that will obviously be beneficial. So right now, we're not anticipating any unusual share buyback. Our current thing is to stick to our dividend policy, which is steady and incremental growth in dividends in keeping with our profit, growth in profit.

Right, right. Okay. So what I'm coming to is, Piyush, even after everything, 14 seems like a pretty defensible number, assuming, let's say, the 0.4 comes back, let's say, 12 months' time and then on 0.7 goes out. So net-net, you still are at least 100 bps above where your target is. So is it fair to assume payout ratio is increasing, especially with rising rate environment gives you that, even if you provide a bit more bps rather than 0, it is closer to 10 bps, there's still a lot more room to accelerate capital. So is it fair to assume that the payout ratio...

I'd say it's a fair statement that we have a lot of room. But I never look at indicator payout ratio. I've never done that so far. Our dividend policy is not based to work backward. You figure our ratios being close to 50%, 55%, but I don't really start with the payout ratio and then determine what dividend to pay. We try and figure out how much is the growth rate and the growth in our profitability, what we can use the money for. And then we work forward to see what is the appropriate dividend that we can pay out.

Okay. And the final question, Piyush, if I may. Lakshmi Vilas, Shenzhen Rural Commercial, part here, a lot of city now, a lot of stuff in the works. At what point in time do you see even more meaningful capital allocation to one or more of these businesses? And how do we think about P&L impact? Is it more a '23 or '24 overall the incremental delta, both on capital and on bottom line?

So Harsh, I think the businesses where you see the peers, we are seeing impact in capital allocation are the ones we acquired inorganic the same because they're chunky. So LVB is already an -- I think is really well. It's coming through quite smoothly. And over the next 2, 3, 4 years, we plan to continue to allocate more capital into India and grow the India book. I think that the last 2 years, it has obviously been outperforming. And on current classic fee, it will continue to do well, but it will still need capital for the next 3, 4 years before it can generate its own capital. On General Commercial Bank at this point in time, we don't need to deploy more capital. But it's -- again, that the bank is doing well. The business is doing well. So if their capital falls over the 2, 3 years, we've pour some capital in. It could be -- if you look at the production the shareholder at this point in time, prior to that will be the public markets, which is hopefully, a 3-, 5-year event. So it is possible that the bank might need more capital, then we look at it if that happens. But again, that's meaningfully accretive already, and you can, again, see that in our numbers. Maybe Sok Hui wants to comment on that.

Yes. So currently, we put the associate's contribution on the other income. This is not so material yet. So for this quarter, it's actually about $66 million versus $40-odd million in the last quarter because last quarter, we had about 2 months impact. This quarter we have 3 months impact. So that's not -- it's not that small either, $66 million, per quarter.

And then the third is the Citi Taiwan, which obviously will indicate only by summer next year, but again, that business starts growing off, starts growing up money very quickly, and it's also been quite meaningful in terms of size. Now this is separate from the digital activity that we have. So if you look at the digital exchange or partly or fixed or even though we've started working on the software monetization, none of these require too much capital. So you don't have to allocate capital to those. As they scale up, you might have to start allocating some expense dollars into them. But these businesses, any one of them is not going to show up materially in our numbers over the next 2, 3 years. It's a slow burn.

Our next question, Nicholas Teh, Credit Suisse.

Just wanted to clarify on the credit cost guidance. I guess, 15 to 20 bps in terms of SP would be the normalized run rate, and you're being more conservative on the GP write-backs because, obviously, the macro is quite uncertain. I guess, where we do see the SP migration, there will automatically be some GP reversals. So is this kind of run rate of 5 bps of overall credit cost that you're seeing in the first quarter, I guess, accurate to look at if barring any unforeseen circumstances, obviously.

Yes. That's a good question. I hadn't thought of it. What is happening right now, Nicholas, you're correct. Because it is conservative in our ratings at our models, as since our move to SP, we are actually finding about almost 70% reverses from GP. Is that the right way to think about it?

I think it varies depending on the case, depends on how fast we pick it up. We have put early warning tools. So I would say that in a good scenario, we should be able to release about half the SP from the GP that you see.

Okay. And so in the last quarter, so we released the last chunk, we can call it half. Good preservations in the half, it automatically comes from the models in the book, and the rest of it is incremental. So yes, when we say 15, 20 basis points of SP, some of that will come from GP. Maybe half will come from GP, and the rest in the national cost.

Yes. Okay. And the second question I had is just I remember you were talking about monetizing some of your digital assets last year. Obviously, the market has changed quite a bit. But is there further details in terms of which parts of that digital portfolio of platforms you have that you could look to monetize? And is this -- after looking at it, is this something that doesn't look like it's possible in the near term given the market?

Yes. First of all, the intent of monetizing was never, we will do it in 2022 kind of thing, right? So it is something that we can monetize. If you look at -- I saw in my head, think of it as 3 categories that we're exploring. One is businesses which are in the bank that we could potentially spin out and the -- two, which are most -- the one we exploited the most. One is the payment business, the remit business. And other is last year democratized wealth business. The financial planning event business. Both of those, we still think have possibilities. We have teams that are working on that. Our general agenda is to make sure that we have line of sight to EBITDA, cash flow and how we scale those businesses if we're to externalize them. So it's not an imminent activity, but yes, that continues to be a possibility. The second category is the business that I spoke much about. The businesses we put some new business investments in the carbon exchange, the part of your business, the digital exchange, the fixed income marketplace, et cetera. These, I think, are slower burn. I mean, I think of each of these has got some possibilities, but there will be like a long lead time before they start scaling up to larger numbers. And the third category is we're actually in the process of packaging and seeing if some of the technology that we failed, we can monetize this by distributing the technology itself to other people. There's a lot of intensity in our technology solutions. And that is something also that's gone to the public. But it is unlikely, particularly given the market and the massive sell off, I don't think you expect to see any of that happening in the course of this year. And even next year, we will judge when there is real opportunity and when the timing is right.

We have our next question from Jayden, Macquarie.

Apologies if this was covered on the media briefing, I wasn't able to make it. Just around the trends for wealth management. Obviously, there's been a slowdown. But can you provide any color on what you've seen in terms of assets under management, if you're still seeing inflows? And if we should still expect to see high single digits or 10% growth over the space of the full year? What's your latest views on the wealth franchise in particular?

Yes, we did talk about it in the media call. But AUMs are up by about $3 billion. In particular, I think they went from 291 to 294 for the quarter. Net new money was also, because Singapore has $3 billion of new money, so most of the inflows of new money, the rest of the portfolio sort of held flat. Our overall wealth business, as we indicated, was up 20% from first quarter last year. But the first quarter last year was also an outsized quarter. It was very, very strong. As we are going into the second quarter, I think we're tracking more at last year's level. It's not a huge down, but we're also not seeing a big lift from last year. So if markets stay where they are, then we'll be challenged to get a lot of growth on a year-on-year comparison basis. Certainly, at this point in time, given the 20% drop in the first quarter, I don't see us getting double-digit growth for this year. Whether we eke out single-digit growth as a function of market sentiment in the balance of the year, obviously, market sentiment recovers, which is principally the equity market, then obviously, activity will come back. The only positive thing from that is that we have a lot of dry gun powder. Like I said, AUM is up, customer is up and our non-invested monies in the AUMs are quite strong. So we do have a lot of -- our customers have a lot of dry gun powder, I should say. So if there is a turnaround in the sentiment, I can see the money being put to work quite quickly.

Okay. So it sounds like there's nothing structural. It's just short-term cyclical. Any sort of color you can provide on new customer acquisition or anything like that to sort of prove that it's still growing structurally?

Well, I can give you anecdotal stuff that there's obviously, as you can imagine, a lot of customer growth from North Asia into Singapore. And part of it is because, obviously, the COVID environment. And so frankly, in the last 2 years of COVID, we've had more than 10,000 -- including the mass affluent, more than 10,000 new customers from North Asia. It has been a consistent phenomenon over the last 2 years. And in some ways, that continues to pick up steam.

Our next question is from Krishna, Jefferies.

Just a couple of questions from my side. If you can give a bit more color on your loan growth. I think you mentioned that a potential second half slowdown. If you can give, like, what -- because, I mean, The Street seems, at least investors I talk to, seems to be saying the second half will be better than first half with inflation coming down. But you mentioned that potentially a second half slowdown. So if you can give some color as to what you are seeing. And is it going to be a high priority event? Or is it just something not to be too worried about? That's my first question. The second question is on the fixed deposits. Are you seeing any shift to fixed deposits, especially for your U.S. dollar liquidity? And the final bit is on the write-back. I mean, out of your general provisions that you have made, how much is related to oil and gas? Or is it all already taken out? If you can answer that, that would be great.

Okay. Krishna. So on the first question on loan growth. On the corporate side of the business, I really told them, in the CapEx. If you look at our pipe for enterprise, robust. First quarter was 2/4, was 2%. Second quarter is also very strong. The pipelines are good. That's only predicated from view of the macros. Nobody knows that inflation comes down a lot in the second quarter or the GDP growth rate reduction flows through in business activity or not. And because everybody is calling for much lower GDP growth into the second half of the year, it is possible and it's logical that, that should impact loan growth in the second half of the year. So what do they got, they have to be cautious that given overall what's happening the GDP environment, loans might come off. One area on the corporate side where we benefited in the first quarter was trade. Trade went up by a couple of billions, and partly, that's because of underlying prices. The volume of trade didn't change so much, but the value of trade went up because obviously, oil, energy, everything, went up. Now if the prices start correcting in the second half of the year, that could reverse that trend. So that's the only thing to think about on the corporate side. The other channels we have is where I'm guiding for slightly slower second half is on the consumer, on the wealth side and the mortgage side. So our original agenda, I mean, our thought was that we're be able to grow the mortgage book by $3 billion, $4 billion this year. My revised outlook based on the December tightening the government did is, I think we'll be lucky to get about $1 billion and change. So we'll probably -- it is going to be short a couple of billion dollars on the mortgage book. And on wealth management, it really is linked to the first question. So part of our growth in the last year or 2 has come from margin financing. But if customers don't deal because the environment is not conducive and the confidence is low, then, that impacts the margin financing book at the same time. So there are a lot of moving parts we have. Could we continue to get 2% growth in the quarter? It's not impossible. But when you put all those uncertainty, is it possible that you get a slowdown in the second half of the year? Yes, it's possible as well. That's what I'm guiding. Your second question on the fixed deposit shift. Actually, we're not seeing anything right now, including in the U.S. dollar book. I've actually has said quite encouraged that a large part of our CASA base, especially U.S. dollar, is driven by transactional activity. It is all of the APIs and the cash management system keep reflecting that the underlying volume growth for us has been up 15%, 20% each year 2020 -- one over 20% in the last 2 years, we're getting that kind of growth. And so our last part of the CASA base, I'm hoping is that is sticky because they're accompanied by transaction volumes. So right now, we're not seeing any shift. We're not even seeing the shift in Sing dollars. Of course, it will come. When they go up, you will expect to see some shift, and that's what we modeled into our assumptions, but we're not seeing it yet. Your last question on the GP provisions. We don't have anything particularly related to oil and gas. The oil and gas portfolio is pretty much cleaned up. We don't -- in fact, in the last year or so, we've been getting a recovery. So a couple of the chunky recoveries we've seen in the last year have all been from the oil and gas sector. We don't have anything specific for that sector at this point.

Just one last question. So oil and gas recovery, do you have -- do you kind of get a sense of how much share of idiosyncratic recovery can you have in that portfolio?

I don't think there's a lot for recovery in that portfolio either. I mean, the chunky ones, which we are watching on quite a float, so we see some. Every quarter, we see some. We're very conservative when we dive through that portfolio. So as being able to get to the sum of the assets, the drill shape, the steam, et cetera, we are seeing recoveries, but no, there are no meaningful large recoveries that the management are weighting on.

Our last question is from Melissa Kuang, Goldman Sachs.

Earlier, last quarter, you mentioned that your exit NIMs are looking like 1.58 to 1.6 based on 4 hikes. Given what we are seeing in terms of hike this year, can you perhaps give us if you have a revised guidance on this? And then the second question is just on your Digibank Indonesia. And how are you seeing [indiscernible] digital bank, some of the vehicle in Indonesia [indiscernible]. Are you also going to stay in there and push there?

So on the -- I don't depend on how many rate hikes you assume, Melissa. Last, I saw some modeling based on 7, 8 rate hikes, a couple of them front-loaded in the base that we incur full year NIM somewhere in the -- what we have told you as the exit NIM last time, around the 1.58 to 1.60 range. And our exit NIM would be closer to the 1.80 range is what I saw last. But like I said, you can come up with your own thing, depending on when you put a 50 basis point hike in May and another 50 basis point hike June, we'll you figure out roughly. But I think order of magnitude, that's what you might want to look at. There's an exit NIM closer to 1.78, 1.80, and a full year average NIM closer to 1.58 and 1.60 kind of levels. Your second question on Digibank, we continue to grow our business. As I said, we're focused on making sure that we get good quality customers, and we are increasing that cash flow and trying to monetize the base. So we are not growing the Digibank customer base just for customer acquisition. And that's been our strategy now for the last 2 years. It's a slow, steady growth. We still lose money. So our annual expenses both in India and Indonesia are not being covered by the revenues they're getting. But the revenue that we're getting is improving every year. And so we do have some optimism that we should be able to break even on our cash flow revenue basis over the next few years.

So, Melissa, just to be clear, the NIM guidance that we're talking about assumes that we have about 7, 8 rate hikes this year. When you asked the question, I think this all depends on the number of rate hikes this year.

Yes, just to underline. I mean, I'd rather see that you make your own assumptions for the rate hike to see where we wind up at. But I said -- I heard something and certainly, we said that if we have 7, 8 wage hikes, this is what we will wind up with.

Okay. And then maybe you answered this earlier, but maybe, I guess, last question. In terms of the CET1, the drop from 14.4% to 14%. The dividend payment, was it due to the MAS, the pull back on your capital? Or were there some other things in terms of the CET1 drop?

Maybe Sok Hui will give you some color on it.

Yes. So the operational risk charge is that 0.4 percentage points. So you can think of it as -- that's the primary reason why it dropped from 14.4% to 14.0%. There are a few other drivers. I think you'll see most of the U.S. banks also announced that there was an implementation of the standardized approach to counterparty risk rating. If you look at our Pillar 3 disclosure, that's been quantified 0.2 percentage points. The decline on fair value for OCI bond, that was another 0.2 percentage point impact. But there was offset in this quarter because we also received the approval from the MAS after working for 2 years on the advanced model for wealth model. So that gives us an improvement of 0.4 percentage points. So these are the drivers that actually offset to neutralize the effect of the SACCR, the FVOCI. It's in the Pillar 3 disclosure.

Thank you. We have now come to the end of the Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Thank you, everyone. We'll speak to you next quarter.