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

Ladies and gentlemen, welcome to the Q&A session for the Second Quarter 2022 DBS Analyst Briefing. I will now hand the session to Hong Nam to begin today's presentation. Hong Nam, please begin.

Good morning. Thank you for joining our CEO, Piyush; and our CFO, Sok Hui for our analyst briefing for the first half results. As you've just gone through the presentation, we can go straight to the Q&A. Operator, can we please have the first question?

Our first question is from Aakash Rawat from UBS.

[Technical Difficulty]

Aakash, we can't hear you. Operator, maybe to the next question and come back later.

Our next question is from Nicholas Teh, Credit Suisse.

Just 2 for me. Firstly, just want to understand income growth expected to pick up in the second half, but at the same time the market is -- or the macro environment is pretty uncertain. So in that backdrop, would you look to take the opportunity to build up GP buffers further in the second half? And the other thing just wanted to check on the cost-to-income ratio, did you mention reaching sub-40% by year-end? And just a last one on the private real estate company exposure, could you give us more detail on how big that is in billions and how much of that is secured against what kind of property and any LTV information you have?

So on the general provision, very unlikely that we will buffer up general provision further. Actually what's been happening, as you can see as we move things to SP, our models wind up releasing GP because we normally typically built up about 50% of the thing in GP by the time it moves into SP. And at this time, we have a substantial amount of cushion in our GPs. And like a lot of banks who chose to reverse GP late last year, early this year, we didn't touch it. So we've got $1.5 billion -- $1.8 billion in the GP overlay still there and we think it's more than ample. What we will do is not reverse that. Earlier our plan was if we have -- we had about $100 million in SPs or in allowances in the first half of the year, our original plan was that we would just reverse enough of that buffer so that whatever we took in SPs would wipe out. As things are, we'll try not to touch that buffer so that gives us enough cushion as we go into the later part of the year and next year. On cost-income ratio, I said I think we should be able to get to sub-40% by year-end because they are definitely income driven. I do think we'll increase our expenses a little bit from where we are because I do want to or we do want to invest in adding technology and technology resources. But aided by the [ astronomical ] increase in NII, we will be able to get 40% or sub-40% cost-income ratio by year-end. Your third question was on the private part of the real estate. I think the private owned companies in the China real estate book are about a couple of billion Sing dollars -- just north of a couple of billion Sing dollars. There's really half a dozen odd companies so it's not a huge number and the nature of the exposure is actually diverse. We have some specific project, we have some [ competitive ] loans. It's a mixed bag.

Our next question is from Harsh Modi from JPMorgan.

Piyush, Harsh here. A couple of questions. First on the China real estate, again there's huge amount of debate to how should we look at risk. I'm assuming net worth customers are all right, SA are all right in the POE space slightly above $2 billion. Could you give a bit more detail as to how comfortable you are in terms of completion of the project or the completed project kind of thing, close to completion, Tier 1, Tier 2 cities, Tier 3, Tier 4? And your risk assessment lies -- like how do you assess how good or bad could that portion of portfolio be? And I have a couple of follow-up questions after that.

Now Harsh, I don't have an update on what percentage of the project will be. These are very corporate developers and so far we're not seeing any problem with their projects and the projects on other things. They seem to be working fine. They have enough cash flow and liquidity so they're not stretching. They have almost no refinancing needs coming up till for the next couple of years. So we are not seeing any stress from a liquidity standpoint and we're not seeing any questions or issue right now from the projects that they have on hand. Now how much and what percentage are complete, et cetera, I'm not entirely sure.

Right. And out of that slightly above $2 billion to half a dozen privately owned developers, are there any in the watch list or what's the total stock of provisions against them or you don't see a need for that?

No, no, there is no provision in that case. I mean the whole sector -- my first high level watch as I call areas I monitor amber or something. So of course the whole sector is in amber. You'll be daft not to be looking at the sector. But no, we've not had to really look at the thing. The one -- we had some smaller thing, right? So we took one case into NPL with some provision in the second quarter. You can see that in our numbers, but it's not very big.

Okay. Second bit on the CET1, we are at 14.2% and if I read your guidance correctly, you are almost guiding for almost 30 bps Q-on-Q increase in margins in third quarter, fourth quarter's on top of it. just the amount of capital you're accreting with that is quite humongous. So the point is, is that 12.5% to 13.5% CET1 range still a target or do you think given multiple other bits, everything other than margins, there can be some question marks over next 12, 18 months? Would you prefer to keep a buffer above 13.5% for a period of time? And how should we even think about, let's say, capital level end of '22, end of '23 because there's massive amount of capital allocation going through?

So Harsh, I don't think we need a lot more capital than our guided range. So our guided range is 12.5%, 13.5%. If you look at it, we've tended to be closer to 13.5% to 14%, right? It's not -- I mean I've got a little bit of question above the guided range, but I don't think we need a lot more capital than that. And again from my assessment of our portfolio and where we are going forward, I really don't think we need large capital buffers. As I've said before, our portfolio quality looks good. We've got enough general provisions, our total allowances are $6.9 billion. So I don't think we're going to have to dip into capital. And so the outcome of that is that what you said is correct, I think we'll be sitting on a lot of capital. And so as long as we have certain degree of greater clarity, we will have to start thinking about how we can return that capital in an efficient way. So it's something we will get around to looking at maybe at the end of the year.

Right. And do you sense that regulatory approval for any sort of buyback will be forthcoming because, as you said, base case is all right just about. There are some fee risks emerging. So in case you want to do meaningful capital return or buybacks, do you think you'll get regulatory approval for that at least in size because getting from 14.5% thereabouts to 13.5% is a lot of capital built up?

I don't anticipate a problem if we wanted to go that route honestly. I've not discussed this with regulators at any length. But again given the assessment of what we have, if we want to do that, I think we would be able to get regulatory approval. Actually Harsh, let me tell you the reality is that when Basel IV kicks in in early 2024, the way Basel IV rules work is extremely advantageous to a bank like us. So our capital adequacy goes up even more. So for the transition period from '24 to '29, our capital adequacy will be up by another 1 percentage points to 2 percentage points when that happens. So it's not just the capital that you're seeing we're accreting, it's the Basel IV rules adjustment will further help our capital adequacy. So at some stage, I don't see the regulator or anybody having a problem with allowing us to think about efficient ways to return capital.

Okay. Really looking forward to that, Piyush. And the final question, if I may. If you think about '23, '24, I know a bit too early. But as you think through those couple of years, how should we think about provision ranges? Should we keep closer to normalized or you think it makes sense even if you're not getting lot of SPs to just keep adding up GPs just because things appear tougher and '23, '24 we may end up having above normalized provisions.

So Harsh, first of all, I gave guidance the last time. Then I used to say our provision range you should look at 20 basis points to 25 basis points or 22 basis points to 25 basis points. I think on a secular basis, I'm a lot more confident that we are looking at more like high teens 18 basis points to 20 basis points and that just reflects a substantial improvement in our credit processes. So if you look at where we are right now this year, we had 8 basis points for this quarter, 11 basis points or 12 basis points for the first half. I don't see it going materially up for '22. So '23 if you go up from 10 basis points, 12 basis points, if you get back to the guidance we've given, you'll get to 18 basis points to 20 basis points. If you get substantially above that, you could get to 25 basis points, 30 basis points, 40 basis points. The GP overlay that we have that's worth about 80 basis points to 90 basis points. So either you've got to assume that you have another episode of 80 basis points, 90 basis points in which case we got to start buffering up and more. At this point in time, I'm not seeing it.

Yes. I'm trying to triangulate there is a huge amount of capital accretion, provision completely agree, let's say, 2025 seems the top end of the normalized range over the next 2, 3 years yet dividend -- so then the dividend number becomes the -- either you do a huge acquisition, which in your media interview, you said probably -- comments you said probably not looking at it right away which means the only way of managing -- balancing that is massive payout. So that's exactly where I'm trying to understand how should we think about next couple of years, something is got to give between these 3.

So what do you want me to say?

Is that the right way of thinking about it?

Harsh, yes, it's the right way to think about it. We will continue to deliver on this with our Board and then you'll probably hear more towards the end of the year.

We have got Aakash Rawat on the line, UBS.

Can you hear me all right this time?

Yes.

Okay. The first question is just on the credit cost, Piyush. I think if I'm hearing your guidance correctly, you're saying that for this year it should be in the range of 10 basis points, 11 basis points or so and then next year it could go back to a new normalized level of 18 basis points, 20 basis points. Is that correct?

Yes, I think so.

Okay. Got it. The second one is just under your base case, when do you see the majority of NIM increases behind us? Would this be, let's say, the Q4 of this year that a majority of the NIM increase would be done?

Well, I think on the one hand, you got to figure that the pace of NIM increases has exceeded our expectations because the flow-through -- pass-through rate into Sing dollar has been on the high end. As you know, my general rule of thumb is for a full cycle, you should get about 60% pass-through from U.S. dollar to Sing dollar, but that is a barbell. So when the Sing dollar is weakening, the pass-through goes up to 80%, 85% and when it's strengthening, that comes down to 40%-odd. So right now we've been in the 80%, 85% range and we've seen a lot of pass-through. But the Sing dollar started strengthening now so my anticipation is that while rates continue to go up, the pass-through will come off a bit. Also as they get much higher, what you have to pay up for deposits also starts increasing. So net debt, you will continue to see improvement in NIM, but not at the same pace that you saw or you're seeing so far, right? So we're saying you see a moderation in the growth on NIM, but NIM will still increase. The flip to that, all of the sensitivity we give is always first year impact. In reality there is a meaningful second, third year impact as well. So our entire fixed rate portfolio for example between actual fixed rate loans and the interest rate hedging that we do, we have $40 million, $50 million of fixed debt will reprice in the next 2, 3 years, right? So when that reprices, more of the NIM flows through at that time. FHR, the mortgage book we have $20 million, $25 million price of our deposit rate. We made 2 adjustments to that so far this year, in fact the second happening only in August. So that tends to lag by at least 3 to 6 months. So that will flow through also eventually. So what that means is that while the pass-through would be lower -- the third thing I want to say is IBOR pass-through was very low so far. It was coming in at 30 basis points, 40 basis points. IBOR pass-through should actually be 80 basis points, 90 basis points. So it's a lot of moving parts, but I want to say while the pace of the pickup will slow down, you will continue to see pretty robust pickup in NIM into next year.

Okay, got it. The next question is just on the SME side. You've mentioned before that that would be one sector that you'll be watching carefully and if any risk arises, it will be from there. Any early signs of anything happening in Hong Kong, Singapore, which is making you little bit worried?

No. Delinquencies haven't moved; 30-day, 90-day; nothing's moved so far. And like I said before, you got to understand that the SME sector and all of the market is coming off 2, 3 years of lot of belt tightening already. So they've been operating at a level where the cash flows were impacted, they weren't getting revenues, they couldn't sell, et cetera. So they're already very tight and they were quite resilient. So, so far I'm not seeing it, but it will come. I think the cost of goods is going up. As the cost of goods goes up, you'll see more pressure on the margins and unlike some of the big companies who can pass it through, I think SMEs won't be able to pass through all of it. So I think you'll see a pickup in delinquencies without a doubt, but haven't seen it so far.

Got it. And just a last question on asset quality. I mean your own outlook is quite moderate benign. But I think the stock market is obviously taking a very different view so it's not giving any benefit to DBS or other banks, any valuation benefits from the higher NIMs. So just from your perspective, like what do you think the market is getting wrong on the asset quality this time?

So I think the old banking sector piece in a deep recession -- first 2 things. One is in a lot of the other portfolios, which are large -- I'm getting an echo.

Aakash, we think it's background from your side. Can you mute your line when we're responding.

So I think the general view is that cost of credit will go up and a lot of people are concerned about the consumer books, particularly in places like the U.S. If you remember the subprime crisis, et cetera. The U.S. is a particular thing where they don't do either the CDS, the debt income ratio calculation, they don't look at cash flows at all when they do mortgage financing. So a large number of western countries do mortgage financing purely based on the asset and then when the customer can't afford to pay, they have the gingerbread phenomenon, they return the keys. And so a large part of the concern is, therefore, the consumer books in the U.S. and west, how much will they get impacted if rates really rise and that's what impacts the banking sector by and large. My own view is even for those countries, the doom and zoom is overdone. I think the benefit that all long deposit banks get from NIM more than outpace any asset quality concerns, my personal view. So I think the sector is mispriced even in the west. But certainly when you come to this part of the world, like I said, the whole mortgage book we're pricing it on cash flow assuming 3.5% rate. So if rates go up well beyond that, you'll see some pain but not a lot. Our loan to value in the Singapore book is 49% on the mortgage book. So it's not only based on cash flow, it's also very well cushioned from loan-to-value ratio basis so which is why I'm quite confident that that's relatively secure. And the large corporate, we've done this repeatedly in our last 2, 3, 4 years; I think they have enough liquidity and financial strength. So that leaves the SME portfolio where I think you will see some strain, but again it's not such a big portfolio for us and I think it's manageable. So when you say what is the market pricing, there's a second order impact of it which is harder to call. It could be that the market and investors are pricing in what happens here from now, which is a deep recession. So if you assume your post-war situation, rates really go high but then I wind up with a serious deep recession and large scale unemployment, then that of course is a different bearing, right? If you assume large scale unemployment, then you can see other kinds of stress coming in your portfolio. That's not something that I'm forecasting at this stage certainly in Asia.

Our next question is from Yafei Tian, Citi.

I have 2. The first one is on the net interest margin forecast. Clearly there's quite a number of reference rates in Singapore. You talked about this in the media call, but would it be possible to give a little bit more granular breakdown. What percentage of loans are linked to each of those reference benchmark rate so that we can forecast going forward the pace of margin expansion better based on those different reference rates? So that's the first one. Along with that, on the Hong Kong net interest margin. So IBOR has come up quite a bit as we get into second half of the year so should we start to see IBOR being a meaningful contributor for you guys? What is the Hong Kong CASA ratio that we should -- or deposit ratio, if you will, that we should be assuming to forecast the Hong Kong margin? I have another question on the net new money and the fee income. So the $6 billion net new money number you mentioned is actually quite strong comparing to many other wealth managers in the region. So I just wanted to understand a bit more if you can give a bit more color which region drove that expansion and is there anything that DBS is doing that attracted a bit more net new money compared to some of your peers?

Let me just see that we run a fairly complex model, which tries to sort of take into account a lot of these planning assumptions; how much are in fixed rate, how much will kind of reprice and how much of our deposits that are sort of low cost might switch to FDs, how much might flow out? So it's a complex model. So to simplify all, we have tested it through sort of -- we have tested the model quite extensively and that's why we are comfortable giving you a number so that you don't have to make all these various assumptions. So we are quite confident that taking into account all these assumptions, the interest rate sensitivity at 18 basis points to 20 basis points is actually quite robust. And therefore, I think that takes care of a lot of the planning that you'd have to make and it's good enough for us to offset rate hikes of 3% to 3.5%. Of course beyond that, we actually think that the number might come down a bit from the 18 basis points to 20 basis points.

And how about the Hong Kong CASA?

It's taken into account.

The Hong Kong CASA, you have the number somewhere? I think it's 70%, the last I saw the Hong Kong board. Does somebody have the Hong Kong CASA number? We're just checking. If I remember, I think it's still in the order of 70%, but we'll just reconfirm. And your net new money question on DBS. So a large part of the money -- majority of the money is from North Asia and I think it's -- I mean anecdotally no. The money coming in from everywhere; from Taiwan, from Hong Kong, from the Mainland; large flows into Singapore and we continue to be beneficiaries of those flows. I think partly our positioning as a very safe bank helps and I think partly the digital capabilities and solutions we have on the website help. And finally, we do believe that we bring, what everybody calls one bank, the investment banking and the private banking together quite nicely for some of these entrepreneurs who are relocating or rebasing themself. So I think all of those things have been quite helpful in our being able to get pretty strong net new money flow.

And CASA ratio for Hong Kong?

That's 72%.

Sebastian's there. Sebastian?