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

Hi, everyone, and welcome to our results briefing. You've seen the media broadcast. So we'll go straight into Q&A. Adana, can you open the floor for questions?

[Operator Instructions] We now have the first question from Aakash Rawat from UBS.

So the first one is just on the loan growth. So Piyush, I think you mentioned some of the reasons why you saw the decline in Q4. I'm just wondering like why wouldn't -- why shouldn't we extrapolate these headwinds into FY '23? And on the basis of that, would there be any downside risk to your FY '23 mid-single-digit loan growth guidance. And on a related note, I think you also mentioned the strong tailwinds to the wealth management inflows and the new family offices that you've seen. It's a bit surprising that we haven't seen the impact of that on the loan growth so far. So how are you thinking about this?

Sorry, Aakash, the first one, yes, there is actually -- there's a little bit more of refinancing, which was done in the early part of this year, January, but it's already pretty much tapered off. And so our projections of mid-single digits have been guided by our pipeline and by the loans we're booking right now. So I think the risk on that are limited. There might be some upside because, right, if you look at fourth quarter, the wealth management loans are actually down by a couple of billion dollars. And that's partly, we're getting a lot of money, but people are not doing margin financing to go and buy stuff. In the fourth quarter, nobody was buying equities. And so by and large, people buy equities and bonds that take much financing, but that wasn't happening. So if the markets turn around, right, my general view is Asia, market is a surprise in the upside, North Asia is already looking good. Then you might see a pickup in wealth management loans that we've not factored in into our projections. But I think mid-single digit is relatively secure from what I can see right now. Your second question, I think the one that has to do with why you're not seeing uptick in wealth management despite the inflows, right? I guess the point is that money is coming in, but people are keeping it in deposits. They're not putting it to work.

I see. Okay. Makes sense. Second, similar on the cost. So again, the very strong pickup in Q4. And you're sounding quite positive on FY '23 guidance as well. There might be even upside risk to the 9%, 10% number. How should we align that?

I think the fourth quarter was two things. One, I just took the opportunity to clean up some of these tech things that we've built over the last 6, 7 years, and some of them were not giving us the value we originally expected. So we did a cleanup. We did a onetime per staff, $500 to each staff, we gave it year-end and so that's 1 category. The second category is a full quarter. We did bonus accruals. We hadn't -- we had a strong year. So we wound up having to do more bonus accruals in the fourth quarter. That's all onetime. As we project tight expenses through this year, I'm fairly confident that we'll get to that 9-odd percent range or it could be better than that.

Okay. Got it. And then the credit costs, again, your outlook is quite positive. I just want to see like what are the conviction on that view? Because last time, in the briefing, you mentioned that you were a bit cautious. So one, like what has changed since then? And secondly, isn't -- doesn't seem like a bit early to be taking a view on the impact of higher rates because rates are still going up and usually there's a 6-, 12-month lag before which you start seeing issues.

But that's true. But one of the big changes is China has opened up. And the Chinese are putting a lot of support mechanism into the system. So I think the easiest [ in having ] risk in China is down. They put liquidity into the property sector, they change the property rules, they're putting some support into the system. So that's one material change in the last 3, 4 months. The second is that we've been another 4 months into this. The rate is now at 4.5%, 4.75%. I'm not seeing delinquencies go up. So delinquencies are flattish in SME, delinquencies are flattish in CAR. There are a few basis points have creep up in consumer in a couple of markets. But by and large, there seems to be a tremendous degree of resiliency in the sectors that are normally expected to see some pain in. As you know, we wound up last year at 8 basis points. Right now from line of sight, what we can see, I can't even -- I see no -- there's nothing out there, which of course, we'd expect the SPs to go up materially from there. The reason I'm saying 10, 15 and not 8 is because of what you said. I don't know what the lag impact of interest rates might be. So I think maybe it will be 10, 15 based on that. The other thing that you should remember is that we do have this massive management overlay we built up. We didn't touch it. We didn't reverse it. Last year, we didn't reverse it, we had to pull out, which a lot of banks did. And therefore, we do have the capacity to take -- even if you do have some unexpected more SPs with the capacity, we'll take it in the GP.

Got it. And then the next question is on dividends. So with the peaking NIM, it's arguable, I think that the outlook is not as steady as it used to be. Our higher core dividend, if you had done that, instead of a fancy onetime special dividend, that could have been something small for the long-term investors to kind of hang on to, right? But I chose to have a special dividend. So I'm just thinking like if you -- if you use half of that $0.50 special dividend to raise the core, you could have easily taken the core up to 46, 47, 48 levels. So what is the rationale behind doing a special dividend as opposed to having a higher core dividend. And I think you also -- you seem to be more inclined on special events than the core.

No, no, that's not true. It's only the second time we've ever done a special. We did one in our 50th anniversary and we've done one now in the 55th year. So we're not in client building special. Our general view is to focus onboard to do it in a sustained way over time. And so we do have capacity to do more without a doubt. But in the course of the year, we'll take stock of where to do it and how much more we can lift it, but we certainly have capacity to do more core dividend.

Okay. And then just on rated points like the Basel IV impact that has been talked about, the 200 basis points, what sort of connection are you getting from the prelim conversations with MAS? Because I think the reason I'm saying that is because some of the other banks in Singapore are sounding a bit more conservative on this. And I mean is it also fair to say that these relaxations are actually supposed to help the banks that will face capital headwinds, right? So it sounds a bit -- again, it's not unclear whether MAS will actually allow the Singapore banks to benefit from this relaxation?

No, no. We've had a lot of discussions in here. It's 100%. If the rule -- they can't change the rules because they won't not let you benefit from the relaxation. We've discussed it with them, we explained to them how it benefits us. We called it relaxation because it benefited us 2% in the first year. And then as the rules story lighten, that benefit disappears at the end of 5 years. But 5 years is a lot of time to have that 2% benefit for. And that allows you to do several things like payback core tier 2 for 5 years, you can pay back tier 1 for 5 years, they can do a whole bunch of things in that 5 years. So MAS understands that and MAS is quite comfortable with it.

Okay. Understood. And just the final last question that I have is on the funding costs. So are you still expecting the time deposit rates to keep going up? Or you seeing them flattening out in the market?

So they already started flattening out. In fact, they're coming out because the T bill rate also came back to 3 8, 3 9, and the time deposit rates are also flattening out. If you look at the -- in Singapore, I think last, most of the banks have anchored around 3.85% to 3.90% on the FDs even though they've gone north of 4% at one stage. So they are flattening out.

And this would translate into CASA outflow just going because system data suggests that the CASA outflow is actually not [ strong ] at all.

Sorry, I didn't follow the question. Say again.

The CASA outflow from the system?

Yes.

It will reflect into the slowdown in CASA outflow as well, right? Because [indiscernible]...

Yes. We also see that. By the way, we're also seeing a slowdown in the CASA outflow in the last couple of months. So I think it's begun to level off. The biggest actually chart is I think, is not the CASA outflow to FD, the wild card was the CASA outflow to T bills. That is the wild card. And I think that also if you look at MAS and the government, they use stabilization in 2 ways. They use effectively the domestic market and for most of this year, that's what happened, both through the T-bill and the MAS, they were stabilizing in the market, which kept those rates high. But in the last couple of months, it started stabilizing, to monetary through the exchange rate policy. That's why they started strengthening the Sing dollar rate. So I think the headwinds from that front are going to ease off as well.

Do you see any chances of the government like raise the level of interest that they pay on the CPF for the -- CPF money to consumers?

I think it just started so it's too early to say. The allowance for customers to draw on CPA funds to buy T-bills, right?

No, no. When they change the CPA rate. It's very tough for us to say, it's a political decision.

Our next question is from Harsh Modi from JPMorgan.

A couple of questions. First, on wealth management. You've seen such a massive pickup in AUM broadly in Singapore and DBS. What are the second third order effect where you think you can benefit over a couple of years in addition to just the transaction flow in terms of the plumbing of the system as a custodian? And are there any meaningful delta in revenue or and above what we are seeing right now?

So Harsh, I guess, of course, a meaningful as I say. As a general rule, you should expect that bank can make anywhere -- so it depends on where you are. But in Asia, plus minus 80 to 100 basis points in a year we can make, right? And so if AUMs keep increasing, you should expect to see a percentage point increase in the revenue just coming from the fact that we have more money and clients put more money to work. But there is a dependent benefit because, for example, a lot of the AUMs that are coming in are now ultra-high net worth, family office kind of stuff and that allows us to create 2, 3 additional ecosystems. One is the private access ecosystem. And so our ability to improve the deep flow between the investment bank and large family offices who want to participate in private equity, and that's improving dramatically right now. So because 40 or 50 side deals in our pipeline, where these private wealth people are looking and participating in the investment banking activity, the company and the firm. Now it plays well -- we have a deep -- we have 200,000 corporate clients across Asia, even in Southeast Asia, we have many. To make that connectivity work is a good opportunity for us. It improves our deal flow on both sides, on the high banking side as well as showing different deals to private bank customers. So I do think that's an opportunity. Now there is alternative assets in addition to this current deal, so it takes a lot of question about digital asset ecosystem. I do think that despite the crypto winter, eventually, digital assets, tokenized assets, [indiscernible] assets, they're going to have a role to play. And many of these loads of money which come over here, we want to participate in those kinds of opportunities as well. So I do think that their [ dependent ] incremental benefits if that's what we're referring to.

Yes. Yes. So basically, what I'm trying to understand is, in both of these IBDs and digital assets seem to be more risk on trade. So assuming similar pickup in liquidity, you have the probability of making higher return on AUM because the AUM size has gone up.

Yes. Yes.

Second question. Second is on around capital. Could you just walk us through the thought process on determining $0.42 and $0.50, please?

Basically, you got to go back to our stated capital dividend policy that we want to pay sustainable dividends, with grow -- with earnings over time. So if that anchor your capital thinking around that, then you get to these kinds of outcomes. For us, our earnings are growing nicely, and so we can support higher capital. The earnings will grow this year, we can support even higher dividend and capital payment. But the only thing is strengthening all the goodies at one time, we like pace it out. We'd like to pace it out and make sure it's consistent with the early trajectory of the bank. Earnings in the bank were up some 20% last year. And so we've been able to take core dividends up to about that level, I think 17%, 18%. If the earnings of the bank go up another 20% this year, we can take dividends up by another 20%. That's the philosophy that we try to keep the dividend, core dividend payment sort of in line with earnings growth. And now because we had too much capital, on top of that, we said, okay, we have a lot more capital still, so let's just do $0.50 on a special, but that's the underlying logic.

Right. So basically everything over the next couple of years, should we think broadly in terms of payout ratio with a downside predicted by -- on an absolute basis? Is that how we should broadly think because the previous framework of CET1-based payout seems to be kind of changed?

No, no. So let me, first of all, if you look at our previous history, even though we don't give payout ratio guidance, our payout ratio tends to be in the 48 to 54 range, right? It's around plus/minus 2 of 50, that's what our history has been. And so that's the starting of the -- you could use that as okay, if earnings got 20%, that's what we'd pay. The fact is, I told you guys last time that you have to overlay that with the CET position. It's true that we have a lot of CET. Even if I grow the transition to Basel, we still have more CET than our guidance of about 13%. And therefore, we do have the opportunity to actually bump up beyond that. So whether we actually change that and take the core dividend itself up to beyond the thing or whether we use special is -- always is buyback, a question that we will still continue to debate.

Okay. And the excess capital, you referenced 13%. We are at slightly above 14.5%. How do we -- how do you think this excess capital gets used? Is it -- how much of that may be in luxury villas? How much of that in some of the other things here you are contemplating? Or is it both organic, inorganic? And how much you think is more for -- at some point in time to kind of return to shareholders. How do we think about that? Is there a glide part to 13% or not at all?

No. So first of all, I was going to add Citi Taiwan into our books this year, right? That 0.6% or 0.7% of capital erosion that comes from there once I add that into our book. So I will be at some 14% -- after we do this payout of dividend, we'll be at 14.3-ish, right?

Yes.

Then you take off the 0.6%, 0.7% for Lakshmi Vilas Bank, and that brings us to 13.6% range, right, when I take that out. So that's the starting position that puts actually will last about 13.6% capital. Then how much do I need for organic activity? Lakshmi Vilas has said over 3, 5 years, I need maybe $300 million to $500 million max. So it doesn't move the needle that much. And right now, we don't have any massive inorganic ideas -- but, as you know, we keep an eye open. If something comes up, we'll do it, but I think its sizes are not huge. So we wind up -- if you wind up putting another $1 billion against that, we will still wind up with $3 billion, $4 billion of surplus that we have to return to shareholders.

Our next question is from Jayden Vantarakis from Macquarie.

Okay. Great. Just wanted to follow up some of the comments on the credit charge guidance. I think now you're at 10 to 15 basis points. Does this sort of represent sort of a new normal level? Or are there some sort of short-term cyclical factors at play as you mentioned, with respect to China, et cetera? Just want to sort of understand how the sort of sustainable credit charges going forward?

Jayden, the short answer is not 100% sure. If you go back in time to 2016, '17, the guidance, 2, 3 years ago, my guidance used to be 20 to 23 basis -- 20 to 25, then 20 to 23 as we got more confident with our credit process. And then in the last couple of years, we've been guiding for 15 to 20, 17 to 20, 15 to 20 basis points because we've got a lot more comfortable with our underlying credit process, our target market, our customer selection, et cetera. So I think on a going concern basis, that I'm very confident of. But the last couple of years were single digits, I mean, 8 basis points. Now whether that reflects the new normal of this thing, I'm not 100% sure. I'm pretty sure over line of sight for this year, but I don't see how we will actually have more than 10, 15 basis points, probably at the low end of the 10, 15 basis points, whether we make that our future ongoing guidance, I think I want to wait and see the cycle through and decide how confident we are that, that is the future benchmark that you can use.

Okay. And just with the general allowance, when you released some this quarter, it was down to sort of model impacts. You didn't sort of touch the management overlays, right? Can you confirm how much those are? And sort of how much is sitting there that's available for future years?

Yes. So we didn't touch the model overlays on top of what the general model suggests. So it's still at $2 billion.

The model overlay is about what -- total GP is about 3.7% but through the model overlay, those have come down to 1.7-ish or we topped it up so it had come down. The 1.7, we took it up to 2. What's happening is the rest of our portfolio. The way the model works is that if we are upgrading the portfolio, if people repay the loan, if the maturity of the loan reduces, all of that results, the model results in having to keep that GP. And so through the years, because all of these things are happening, our portfolio is [indiscernible]. You can see from our NPAs, it comes down from 1.5% to 1.1% through this year. So the portfolio keeps improving. Our customers keep repaying us. Our tenors keep reducing as that result in a reversal of that model-based GP over time. And so that's what happened in the fourth quarter. We've got more repayments of some of these weaker credits that tenants came down, and that is in the 100 and some change of GP reversal.

So if I get this correct, there's sort of two things happening, the sort of the model is suggesting to hold less because of the factors you mentioned, but you've actually taken the opportunity to up the management overlay a little bit from 1.72%. Did I hear that correctly?

We did that in the third quarter, not in the fourth quarter. We took it about 1.72% in the third quarter. And then in this fourth quarter, we left it at 2%. You've got to appreciate actually, quite honestly. It's not that the auditors question you, and we try to cover this with things that you want to increase the management overlays. We've got to have very good underlying justification to increase that management overlay on top of what the models are suggesting.

Okay. And second or final question I had was just following up on some of the fees for wealth. I'm sure you're going to get quite a few questions on it. I mean, look, the AUM build is very encouraging. I mean given that we're sort of almost 1.5 months into the year, have you actually seen any pickup in activity? Because I remember before the weakness in Chinese markets had an impact. Have you actually started to see the fee generation improve year-to-date?

Yes. Yes. So we started seeing it improve in January and that's after Chinese New Year. As you know, all the Northeast has shut for several days because of that in Jan. But fee activity improved in Jan, and the client conversations are very good. Everybody is talking now about doing stuff and deals. So there are very active conversations with all of the people got in deposits to us last year. All of them have active conversations about putting money to work.

Okay. So it's basically, that plus the normalization of travel spend that you highlighted before now that, I guess, Hong Kong, especially is reopened, that gives you the confidence for the better than 10% growth in fees. Am I right?