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

[Audio Gap] My next question was just on the -- well, the digital banking outreach and the potential impact that there may be, I think on the call earlier, previously disclosed that it was the same issue. So it was the forward drop the authentication server, do you think this sort of leads to any additional penalties on the CET1 beyond the 40 basis points? Or do we just see this sort of extended? And what's the sort of interplay here with how you view dividends? I mean given profitability is so strong, do you think that there's any sort of impact from that or anything you can share with us at this stage?

Very hard. And obviously, not in our hands, the regulator has been to take a view after they get the full report and form an assessment. So frankly, I don't have any comments on that. But in terms of our dividend capacity and ability to pay, we have a huge amount of surplus capital even today. And come next year, wherever MAS kicks off Basel IV or Basel III adjustment. In a transition basis, we're going to get another 2% more headroom. And therefore, if you start with a position where you have 3%, 3.5% of headroom, it is unlikely that the penalties that might be imposed if there are any are going to have a material bearing on our actual payout strategy.

Our next question is from Aakash, UBS.

I hope you can hear me. The first question I have is just to check Piyush your assumptions on the Fed rate hikes this year? And I think you also mentioned in the media briefing that there's another 30 billion to 40 billion of deposits yet to be repriced. Could you just elaborate a little bit more on that, what do you mean by that? Especially in the context of the system like trends would suggest that CASA outflow is stabilizing, and I think the outflow to T-bills might also be stabilizing? So that's the first question. And then I have a couple more.

On the Fed hike, our assumption is that the Fed is pretty much done. You might see one more hike tomorrow, and then after that, everything they've done. I think that we are not anticipating cuts this year. So we think the rates will pretty much stay where they are for the duration of this year. In terms of the outflows, I'm sure we modeled it, we were obviously beneficial for a huge increase in CASA balances like everybody was. On our original assessment, we had modeled how much of the balances are likely to reprice. And we use various kinds of analytical models to try and determine who is more likely to need to be repriced, who is likely to reprice, et cetera. Actually, in the first quarter or 2, that number crept up over what we expected because of the government issuance of T-bills. We have not factored that competitive environment where people looking to put money with the government. But that obviously has us limited life because at this stage, there is no new money going into T-bills. What's happening is money is getting recycled as T-bills are maturing, T-bills, if at all, are going back into T-bill something is down. So that slowed off, also outflows to everybody else or repricing that we have to do ourselves. That's always been on track. That's consistent with our model. So based on the modeling that we've done, we think we are about 75% or 80% of the way through all of the deposits that we think are likely to be repriced. And I'm pretty confident now we've got 4, 5 quarters under our belt. And our models are tracking fairly accurately to the actual repricing barring the T-bills, which was an anomaly. So that's where we are.

So our modeling would also include, for example, some of the CASA account switching to fixed deposits as well. So that's all included in the 30 billion that we talked about. So as an assumption, it is our own modeling.

Okay. Got it. The next one is on asset quality, please. So I want to get your thoughts on the credit cycle -- typically the biggest asset quality problems happen, at least in the last few decades, they've been sort of boom-and-bust cycles, right? And there's also some indication of what that boom was going into that. What was the sector where majority for share is trending was going on? At this time, I think define that looks a bit trickier. So -- but if you -- I wanted to ask if you were to take a best what sectors do you think this risk could come from? Especially for the exposure for Singapore banks including yourselves?

I've been saying for 2, 3 years that you should expect the biggest test to be in the SME book. Because when inflation goes up, the cost of goods goes up, interest rates goes up, the funding costs go up, and they have less pricing power than large corporates. We get squeezed. So I mean waiting to see when delinquencies and stress in the sector increases. And it's just a surprise to me over the last 12, 18 months now, we're not seeing any stress at all. And so I try to unravel why that is the case. I can only attribute it to the fact that they've had 3, 4 years of a lot of stress already. So these SMEs were hammered to COVID, they got hammered in Hong Kong, they got hammered even prior to COVID with the China-U.S. geopolitical tensions. And so; a, we've done a lot of cutting in the portfolio gradually over time. And second, that the SMEs themselves have built a degree of resiliency over the last 3, 4 years. As this happened, the bulk of our own portfolio tends to be secured in that space. And therefore, and our loan-to-value is not very large. So it's not that we expect you right or even something would happen, but that's the one part of the book where you have to watch. And so when we continue to be cautious and build general provision, one is for that you never know when the SME book starts getting worse than it is right now. The second part of the book you got to watch is unsecured consumer space. Again, it's not a large book for us, so in our card portfolio plus unsecured consumer loan portfolio everything, it's shy of $10 billion. So far, again, we are not seeing any threat in that. On credit card by enlarge the pricing is capped around the region. So increase in rates doesn't flow through to the consumer and higher pricing because the regulations cap interested. On consumer lending, there is some stress. We've seen some early signs of pickup in the delinquencies in Hong Kong and China in that unsecured book. But as China is opening up and the travel is improving, actually, in the last month, I think it's being to stabilize also. But there's a second thing you would look for the unsecured consumer book. Outside of that, we are really not seeing stress anywhere in our portfolio. And we've done a lot of sectorial reviews at high interest rates. We've pushed the envelope on energy prices, inflation rates, rate, et cetera. We're not being able to pick up any systemic risk in any sector.

Got it. That's very, very clear. And then I think the second level of risks would come from some sort of conclusion from the developed markets. And if you just not referring to the recent bank failures, which as you described they're using credit. I'm don't mean sort of the NPLs that might happen in developed markets, in the CRE space, and that spreads to Asia through contingent, something similar to what happened in the GFC either through exposures directly or through the sense of the squeeze in money markets. So how would you think about that? How would you rate the risk of that? And is this something that you can do to hedge against those risks today?

Well, it's hard to -- by the way, we -- one way of hedging when I said we've added another close to 200 million, I think 185 million, 190 million overlay this year. we did that only for potential weakness in the developed markets side, right? So there's some modeling around what could happen in the U.S. and Europe. I think Asia is relatively solid. And so we try to -- one way to hedge is to build reserves in case something comes through, and you can build reserves. At this point in time, we have, I think, 2.1 or north of that in management overlays that we built up in our book. And there's a lot of cushion. So it's something unexpected that flow through from losses, et cetera. I think we have enough capacity to be able to deal with that. The second, then we look at is liquidity risk. So what happens if we start seeing mark exiters of dollars from the system because of weakness in the U.S. and developed market. It's possible, but as I pointed out earlier, there's just so much liquidity. I think the fact that the Fed balance sheet has gone up to whatever it is, $9 trillion, $10 trillion means no matter what it says, there's a lot of money is passing around. And so far, therefore, our access to commercial paper, access to borrowing, repo lines, liquidity and system is very strong. Now that having been said, particularly after the liquidity outflows in some of these banks, we've been very cautious as well. We continue to hold a lot of high-quality liquid assets. We lend a lot of money to the central bank, and we keep that on reserve and so on. So yes, both of these are possible. It's not clear to me that they're going to be very consequential to the Asian banking system or certainly to DBS in this year.

Got it. And then just the last one is on the 10% exposure to DM CRE space. How much of that is related to office space?

It's actually not the DM, it's all the markets outside of Singapore and Hong Kong. So it's not just market, but yes, there's a chunk of U.S., U.K., Australia and that. That split between retail office and a whole bunch of categories. And frankly, I won't know the number only for that 10%. Let me see -- add some notes here. I think since we has that number for the entire book, but -- see office of the actual book is about 22, but I don't know how much that is -- of that 10%, if you will.

I see. Do you think it would be higher, lower compared to your blended average?

I mean, okay, let me try and say. It's hard to say. I'd have to go back and get somebody to check the exposure at 10%, what they comprise.

Okay, sure. No, problem. I can -- I think I can get back later.

Because part of the export has come to REITs and the buildings we've taken into -- we finance some REITs and there's some REITs own some bindings in the developed market world and so on. So we'll calculate somebody to get back to you on that.

Our next question is from Harsh Modi, JPMorgan.

A few questions, Piyush. First, I think you guided for a special dividend or a likelihood of a special dividend in midyear. Given all the comments around MAS, Basel IV and pretty good profitability, even comprehensive income is pretty good. So net-net, should we expect that all else equal, the view on special dividend still stays for midyear?

I've never guided for special dividend in midyear, so I'm not sure where you get that from.

Okay. But there was some indication that maybe you could do a bit more capital management or that was not exactly -- not at all the guidance in.

No, no. Everything. The midyear is the stuff I've never guided to. What I did guide to is that we have a lot of capital. So yes, we can do more active capital management. The midyear is the stuff that I don't give any guidance around midyear. And that I would say, I do think there are a lot of capital, and we can do more proactive capital management. It is something that we are working through with the Board.

Okay. So not necessarily midyear, but -- okay. All right. At some point in time. Okay. The second thing on margins and more importantly, duration, your behavioral duration on deposits is way, way, way longer. And at this point in time, when interest rates are where it is. Is it -- are you looking to do or try to fix longer-term, let's say, owner-occupied mortgage, trying to do 5 year, 10 years. Is there a demand for that product? How do you think about it in terms of trying to lock in to the extent you can, if it means giving up something now, but for next 3, 5 years, you kind of reach a much better place on margins structurally?

So going back to the earlier question of how much duration you want and up to what. The specific, the first one is specific answer to your question, there is really no demand for 5 years. I've tried a couple of times, and there tends to be very little pick up. So even now I have a 2-year products, 3-year product, and the bulk of the demand is for the 2-year fix. In fact, in April, I think it was 68% of our mortgage loans we gave out were in the 2-year fixed rate category. So you don't get too much demand for 5-year. The longer-term loan is generally if you need -- get to 5-year trend to be for large corporate loans. So people could borrow fixed at large corporate, but many people are not doing that right now. Everybody has taken a view that rate cuts will come. So it's very hard to get people to bite at a 5-year fixed rate as a general too. The other thing we do an assessment that sometimes we take our floating rate loans and then we actually use the swap markets to swap the floor to fixed, and that gives us some duration. And that we do on a continued basis. Right now, when we look at our total duration in the book, some of it comes from the proactive floor to fixed swaps. So that is something that we look at. But when we do it, we take into account the overall interstate risk in the banking book, how much we can afford to do and what's a good number? And like I said, our overall duration or the duration part of our book, our loan book is on the loan side, our overall duration stat on the fee. And so it left to me, yes, I would try to add some duration at these levels until we're looking at what we can do.

A couple on Sing dollars is it a risk that if Sing dollar weakens meaningfully and say earlier comment, it's actually a dollar does appreciate. Is that a risk to the cost of fund and NIM, because the Sing dollar interbank rates have settled below dollar rates. And if we do have meaningful Sing dollar weakness. Is that something we should worry about or not really?

In our modeling, it doesn't show up as a major variable at this point in time. I think the overall Sing dollar rate, even with the companies in the market are holding up. You're talking about the mortgage rates and the loan rates; we've been able to hold pricing. And actually, we've been able to drop some pricing on the deposits on the FD. So again, in our modeling and projections for the year, I don't think that's a real variable.

Yes. So our model assumes that in the total exchange rate, we assume that it's going to be quite stable. And therefore, it doesn't have a major impact in our margin.

Harsh, the question was supposed in Sing dollar weakens a lot. We are expected to have a material impact and...

I think in the environment, I think the pass-through is actually better.

Yes.

Yes. So in the environment, actually, the past through is actually backlog in Sing dollar.

Great. I was more -- that's fair, absolutely. But what I was worried about is, if it weakens and there is a bit of a deposit outflow or liquidity outflow from the system, does then, then start impacting your deposit beat us way more than what it has been right now with the liquidity ramp?

The outflow in the system and the liquidity tightness. Remember the bulk of our -- the low-cost deposits, I think are pretty whatever is not repriced, will reprice it, is quite stable. And therefore, the weakness -- I mean I would say you give us an opportunity to increase our lending rates.

Interesting. Okay. And final question. There are a couple of segments you -- Piyush on SME. Some unsecured consumers, some parts of commercial real estate. If we had to quantify a sort of watch list, what is the quantum you're talking about, where the risk of probability of default maybe probability of default is low, but even just the probability of default is kind of increasing and something which you guy are monitoring closely. How should we think about that quantum?

So actually, It's quiet. I'm not finding a lift in -- you go back to how we calculate our GP model, right? GP models are done for us. If we take a look at the macroeconomic variables. And then we look at the portfolio and what is the improvement or deterioration in the underlying portfolio, that is a bearing on what GP we do. And every quarter, my GP models are indicating the portfolio is getting better and better. So fourth quarter last year, we reversed out $100-odd million in GP because the portfolio were better. And this quarter, we had to reverse out another $100 million because our portfolio got even better. And so I added 200 in management overlay because I didn't want to reduce GP anymore, given all of the uncertainty in the later part of the year. And so really, as we go through or we just the property, obviously, commercial from the test I think actively because of the interest rate environment, which we've strengthened looked at fund management companies, insurance companies, banks, TMT, we are not seeing any material signs of risk in any of the sectors at this point in time based on our client positions, interest cover ratio, debt service ratio and so on. I'm not seeing a pickup on the PDs across any sector at this stage.

And Harsh, you need to understand our GP methodology Actually, when the case really goes into NPL, we reversed out from GP. And our track record shows that because of the way we do our modeling, once the case is identified as red or weak in our terminology, we actually set quite a substantial amount of GP. So that by the time we get to NPL, we typically reverse for half of the specific provision required from the GP actually. So in various ways, we actually try to make sure our sort of entire spec of reserves is very resilient to what we think could be problematic in the future period.

Our next question is Tan Yong Hong from Citi.

And my first question is on NIM. I think you said that the softer HIBOR impact was about 3 to 4 basis points. Could I check what is the impact on the catch-up of deposit and pricing or NIMs in the first quarter? And given that your revised NIM guidance and as far as the first quarter NIM, [indiscernible] does that mean that on a fully required basis, fourth quarter on the NIM side, I think 10 billion, 2%, that's my first question.

Sorry, I didn't follow the question. Can you say that again, you're saying Hong Kong...