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

Good morning, everyone. Welcome to the DBS analyst briefing. You've already heard the media briefing, so we can go straight to Q&A.

Some very brief instructions before we start. [Operator Instructions]. Without further ado, the first question is from Yong Hong from Citi.

Happy $100 billion market cap. I have two questions. Maybe I'll ask them one by one. My first question is on loans. I think the nontrade corporate loans were great, and I think there was also some currency impact. Is this too early to take it as a sign that the borrowers are accepting the rates will be higher than longer? And would that be upside to our low single digits full year view? Just trying to get some sense if this momentum can continue for the year.

I think it's too early to say that. I think it's correct. So we had strong momentum in the first quarter. Our pipelines for the second quarter are solid but moving near to strong as the first quarter, for example. So at this point in time, we're not changing our guidance of low single-digit loan growth. Also, the revised outlook on rates that rates will continue to stay higher means I think we'll continue to see some headwinds in the Hong Kong book as well. So I mean, short answer, I think it's too early to make a call.

Yong Hong, maybe just to add, we showed actually in the CFO presentation, the loans are stated in constant currency. So the growth of $6 billion this quarter is in constant currency terms.

And my second question is on your guidance. I think 6% to 7% of income growth with this low 40% cost-to-income ratio. I think based on these 2 guidance seems to imply some slowdown in your top line and some pickup in OpEx. Just want to confirm each -- this is what you're guiding for.

Yes. The slowdown in top line because of uncertainty. First quarter was very strong. So our first quarter generally tends to be stronger and the fourth quarter tends to be weaker, partly because of the market conditions in the beginning of the year and the end of the year. So I think it would be unrealistic to take the first quarter and multiply it by 4, as an example. So I do think that we'll see some moderation in growth as we go through the year. In terms of expenses, you already got, full year expense is a high single digit, we are keeping that. We don't expect any unusual growth in expenses either. But when you look at our income projection with the expense, you actually wind up in the very low 40% range.

And the slowdown in income that could potentially come from your noninterest income, for example, your wealth management, your treasury customer sales were exceptional this quarter. Do you expect it to moderate over the course of the year?

Well, the wealth management is very strong. So far, the momentum is continuing. But part of the strength in Wealth Management came -- Wealth Management was like animal spirit. So people feel good about the macro environment. And if you remember going into January, everybody figure rates were coming down. And so a lot of people who are open to putting money to work in the market, right? So if rates don't come down, policy is something then and the animal spirit received, then you wind up seeing some headwinds. I mean there is some certain correlation between market sentiment and the wealth management fees. So that's the thing, which is a little uncertain, whether we can continue to get the same growth that we got in the first quarter, unclear. But like I said, we started the second quarter with the same momentum.

And my last question is on capital. I think even if you're a large capital base, you continue to accrete capital, and if you assume this MES penalty get lifted, there will be another 90 basis points to your capital ratio. You add that 100 to 150 basis point 2030 at least, from the Visa framework. Just wanted to get a sense on how are you going to manage this excess capital in a short to LME long-term?

Well, we're going to obviously have to keep looking at our capital position and our opportunities return. We're going to do that through the year because what you said is correct, right? Now we are creating a lot more capital than we're paying out. And so obviously, that's not sustainable. So yes, we will evaluate it through the year.

Yong Hong, just a clarification. The impact of the additional [ operating ] charge is 70 basis points, not 90 basis points. And they role to the Sing dollar operation income only.

The next question is from Aakash from UBS.

Congrats on a [ blower ] quarter. The first question is again on loan growth. I think you're sounding a little bit more optimistic. You're not exactly extrapolating the loan growth momentum. But if I can ask at the margin, is this slightly better growth coming from better gross demand? Or is it in a lower repayments when you compare it to last year? What sort of trends are you seeing there?

Gross demand, Aakash. So the repayments actually -- the only thing we're seeing higher repayments now is really still the Hong Kong book. The rest of it is, I mean, some people borrow for short term and repay and working capital that happens all the time. But this was all a lot of demand. The commodity complex, I think, both energy, I think oil price is going up, and there's more borrowing there, but soft commodity is also a little more borrowing there. Yes, so the demand was broad-based, particularly India. So India was a chunk of that room growth came from India. It's also quite broad-based.

And you mentioned commodity and some of the loans in Singapore. But is there something within the manufacturing or technology-related sector as well? Or is that not really showing up yet?

We're seeing [indiscernible] in the first quarter, but in a pipeline, we are seeing some fairly decent pipelines in the energy complex. We're seeing some decent pipelines in manufacturing and minerals and some in TMT. So there is some in the manufacturing complex as well. No, it wasn't the bulk of the first quarter growth.

And then the second question, please, is on reduction in capital. I think it's pretty clear that you need to do more than what you have committed so far in terms of the core dividend increase every year. The question I'm wondering if the last quarter when I asked you this question, I think you said that the MAS, I was not really restricting you, but maybe the optics were not correct to do a special dividend in Q4. The question I'm asking is, in second quarter, do you think with this further removed now, it opens up the door for you to do a special dividend? Or would you still focus more on a core dividend increase or an off-cycle increase kind of thing, which...

I guess the honest truth is that we haven't evaluated it at the Board. So it would be remiss of me to tell you how we might think about it. I think the underlying premise that we are creating a lot more capital, that is true. And so we will evaluate it at the Board over the next few quarters and what is the best way to return it.

And this can happen before Q2 as well, right, because I think the Board meeting happens every quarter?

It could happen. I mean there's nothing to prevent it from happening in Q2. But like I said, we hasten to add, it's not something we've evaluated yet.

The third one, I don't know how much you can comment on that, but some clients that I'm talking to are suggesting that there is this chatter that you're going to retire this year. Can I ask you for any comments on that?

No, I'm not retiring this year.

Very good to hear. The fourth question I have is just on the -- so the higher rates and higher-for-longer environment, I think right now is good for the company, good margin, and good for the stock, which kind of makes sense and work in the right view. But at some point this will start becoming a problem or a concern for asset quality. So from your perspective, like if the scenario 1 where rates don't rise, how long does it take for them to stay at this level when your NPA formation starts rising? Or when are you to -- actually do rise further? And then what level of units do you think that NPA formation starts accelerating from the current level?

So Aakash, I don't know the answer to that as I've said before. I would have expected NPAs to be higher already for the last 12, 18 months, right? And we've been sort of all girded up for that. We built up reserves, we kept overlay questions because I fully expected that rates where they are, you should see a lot more NPA and cost of credit. So it has been one of the big unknowns to me why we're not seeing it anywhere in the world. And by this time, just in our book or in Asia, you're not seeing this pick up anywhere in the world. And there's a lot of speculation. And part of it -- for the first couple of years, people thought it was a fiscal spending support provided by all the governments. But I have to believe that a lot of that must have run its course by now. I do think that there's an element of excess money sloshing around. I mean the [indiscernible] telling that the Fed printed, I think that just has a huge bearing on availability and liquidity around the board. So maybe there's an element of that, but I don't know. The short answer is, I don't know why you're not seeing more cost of credit. But as we do our forward-looking stuff, all of our companies, all of our individuals are all quite resilient. Now except the 1 place. You beginning to see a pickup in this thing in the consumer book. So if we look at our SPs for this quarter, we had almost 0 in the corporate book. The entire 115 million of SPs is almost entirely the consumer book. And the consumer book is inching up. It's now still nowhere near its peak. It's nowhere near where it was in GFC or whatever. It's like at least 20%, 30% lower than those levels. But you can see that the higher interest rates, we need to stress, some stress to begin to see in the consumer book. Similarly, SME and mid-cap, I would expect it a lot for by now. Not seeing it, there's a marginal pickup in delinquencies, but nothing to write on about. If rates continue the way they are another year, 2 years, does that shoe begin to drop? Like I said, I've been expecting it for a year, so I won't be surprised if you begin to see more stress, but -- which is one of the reasons why we're just hanging on to the excess reserves we built up. We've not reversed them because just the high interest rate environment gives me reason to pause and figure at some stage, it might come.

So 2 follow-up question on this. First one is, you do have some 70, 80 basis points of excess provision buffer. So with that, on the book, why do you think your credit cost can go from 10% to 17% to 20%? Why don't they normalize? Why will they not stay at 10% and you can use that buffer to take care of any NPA pickup that is happening? And the second question is, I think, if you go back to your comment about why -- it's not very clear why the credit cycle has not [ deteriorated ], I think the nature of this credit cycle is also very different, right? So typically, in the credit cycle, we do see a lot of increase in leverage. Loan growth is very strong in the early part of the cycle, which causes NPLs. This time that was very different. Loan growth was actually negative for a [ bipolar ] number of years at a system level. So is that one of the reasons do you think why you won't see any systemic problems, but there might be some idiosyncratic like in the CRE space and stuff right in Hong Kong or in the U.S.

So let me start with the fourth, obviously. I think that's -- I didn't talk about it. I think that is one of the reasons. Both the corporate side -- actually, everything at a sovereign level, countries are much stronger and a far more flexible exchange rate policies and reserves are much stronger. So country-level crisis that you've seen in the past, I'm not seeing that. Our leverage in the system has been much lower. So borrowing are much lower across the board. So what you're saying is right. And therefore -- right, I mean I'm not seeing it other than idiosyncratic stuff in some sectors. So I'm just being prudent. The second observation there is also correct. We have actually 4 bites in the cherry. First of all, our current SPs are at 10%, right? And so even -- and I'm sort of baselining at 17% to 20%, so a lot more cushion in my current baseline. Then my second bite of the cherry is by income -- this thing. We generated $3 billion in the first quarter. So even if you wind up with a few hundred million more credit, we have the earnings capacity to be able to take care of it. My third bite of the cherry is the excess reserves are built up. We've got $2 billion in overlay. So if my earnings are not enough, then I still have $2 billion to take that. And then my fourth bite of the cherry is capital. We still have enough capital. So when I say that we are very solid, we have a very solid balance sheet, because I do think that right now our income statement and our balance sheet is so robust. We can take a lot of pain. But could the situation be more painful than it is now, that's my only comment. Yes, it could be more painful than, right? It's just too unbelievable.

Understood. And the very last question I have, I think, if I heard you correctly, you mentioned that you're now assuming 2 rate hikes this year versus 5 rate cuts last quarter. Is that correct.

The market is pricing 40 basis points. And so I'm still on the camp [indiscernible] yesterday's statement, thinking -- I was still thinking that we get a June, July rate hike and then another one -- sorry, rate cut. I said rate hike even -- the rate cut. I was still on the view that it start seeing 2 rate cuts. But with power statement now, it could be that there is even less likelihood that they cut rates. But right now, we are currently thinking maybe 1 June, 1 July, 1 September.

So it's rate cuts, not rate hike.

Next question from Jayden from Macquarie.

Thank you very much for the opportunity, and you're well done on an excellent quarter. A couple of follow-up questions. Just on the outlook for net interest income. I think during the media briefing, you said, Piyush, there was maybe $100 million of uplift. It sounds like that's assuming 2 rate cuts this year. I guess my question would be if there's no rate cuts at all, is that number higher? And then secondly, is there some potential uplift if you're seeing more opportunity to manage the liabilities a bit more proactively? I mean the domestic system is really flush with liquidity, and it sounds like there's not a huge sort of pipeline for loans based on your previous comments. So just wondering what your thoughts were on sort of the sensitivity for NII from here?

I think if there are no rate cuts, there is more upside. That's correct. So right now our projection is based on 2 rate cuts like I just described. So the none, I think there will be more upside, yes. And then on managing our deposit, we've actually been quite sensible about how we manage our deposit pricing. And so I don't know if we have a lot more opportunity to be sharper on deposit pricing. We have a large CASA ratio. And on CASA, our payouts are very small. Large part of our savings book, we pay out at 15 basis points. So there's not a lot more opportunity to be sharper on deposit pricing. At the same time, in some case, we still need -- you can make a positive margin but you're going to pay the market rate. The Singapore government issuing treasury bills at a yield of between 3.5%, 3.7%, it ranges around that. So if you want to pick up any money in the fixed deposit space, you've got to match the T-bill kind of -- you've got to -- just keep in mind that T-Bill benchmark. And right now, it still makes sense to pick up some of that money because like I said, you can still make a positive carry if you bring in money at that rate.

And my next question is just on the wealth fees. You obviously integrated the Taiwan business and you're now, by far, the largest foreign bank in Taiwan. How much of the growth in wealth fees is from that Citi franchise? And how much more do you think you could do? Because I know that on the media call, we were asking about India, but I would expect that your value proposition in Taiwan is actually very interesting. So did you have any color you could share on that?

Yes. I indicated before, our total wealth fee growth for the quarter is some 45-odd percent. And if we exclude the Taiwan business, it's 35%. I think Taiwan accounted for about 12% of the growth. 47% to 35%, about 12% came from the Taiwan business, but the observation is completely spot on. So we are finding tremendous value on both sides of the franchise. On the DBS customer base, Citi had some product capabilities, which are additional and accretive. And we had to bolster ourselves up because we had to make sure those are available to Citi customers. So for example, online equity trading, we did not have that, but Citi was providing it to their customers, so we had to build that capability. Our foreign exchange. Citi had much better, more robust foreign exchange products than we do. And so we've been able to layer that on and provide that to our customers. And in the first quarter, we're already seeing that our customers are, therefore, improving the yield on the AUMs because we are doing more with them. Similarly, on the other side, the Citi customer base, they were actually not very strong in structured products and structured notes, which we manufacture and it's a big mainstay of our wealth offering. So by being able to offer that into the Citi base or bancassurance into the Citi base, we are getting better outcomes from the Citi base as well. And this is still early days that we integrated in August. So we really had 2 quarters under the belt. I'm actually quite energized by the upside I'm seeing on both sides of the franchise. So I do think there's a real opportunity there.

The next question is from Melissa from Goldman.

Congratulations on the very strong quarter. Just in terms of your NIM, maybe can we give a little bit of color. In terms of the HIBOR pressure, what was perhaps -- what was the NIM compression that was coming from that? And then maybe the NIM in terms of the repricing tile, how much we had? And can you just again share how much more of this repricing that we could see in the next quarter, like in second quarter? Would that -- would HIBOR now a bit more stable? Do you think we can see a NIM expansion? Also just looking forward -- much forward into next year in terms of NIMs, you have done hedging before. I just wanted to kind of think about your hedge position now and how much that will help in terms of next year. Could we still see a better NIM outcome versus what we expected with more hedging or perhaps if you had done more hedging for next year. That's my first question. And then second question in terms of NPA formation. I know you mentioned on the call it's nothing, it's just quite small. It's business as usual, but do you think you can give more color as to what drove the NPA formation increase this quarter? Yes, I'll just stop there.

So on the Hong Kong HIBOR, so certainly, HIBOR came off quite a bit between fourth quarter and first quarter. I think it's 55 basis points on a 1-month rate. So the impact to the group NIM is actually 2 basis points. So we guided that this quarter we had 2 basis points increase in commercial book NIM helped by the duration portfolio, but offset by HIBOR. So the HIBOR impact was actually 2 basis points.