• Upgrade to BUY from Neutral, TP rises to SGD36.10 TP from SGD34.70, 11% upside with c. 7% FY24F yield. DBS’ 4Q23 results are in line, and it is broadly retaining its 2024 guidance. While we tweaked FY24-25F PATMI, our recommendation upgrade is due to improved clarity with respect to its shareholder returns commitment, ie its focus on absolute DPS (vs payout) offers investors “bond-like coupons” with yields that are now too good to ignore, in our view. We think the payouts are sustainable in the near term. A reduced rates leverage and ample overlay buffers are added “bonuses”.

• 4Q23 results in line … with FY23 core net profit of SGD10bn (+26% YoY) making up 99-101% of our and consensus FY23F PATMI. ROE improved to 18% (FY22: 15%) while CET-1 was stable YoY at 14.6%. The final DPS of 54 cents (4Q23F: 52 cents; 4Q22: 42 cents ordinary plus 50 cents special DPS) brings FY23 DPS to SGD1.92 (FY22: SGD2.00, inclusive of the special DPS). This translates to a payout ratio of 49% (FY22: 63% total payout or 47% payout on ordinary DPS). A 1-for-10 bonus issue has also been proposed.

• … with reported net profit down 12% QoQ (-3% YoY). 4Q trends were broadly in line: i) Weaker NII on a 6bps NIM squeeze and muted loans growth; ii) softer Non-II (-8% QoQ), mainly on lower other non-II. Fees, however, were resilient thanks to cards; and iii) low credit cost as asset quality was under control. Specific allowances (SP) was 11bps (3Q23: 18bps, due to SP for a money laundering case). Loans were stable QoQ while deposits rose 2% on higher CASA and fixed deposit (FD) balances. NPA was down 5% QoQ on low formation, which led to a 10bps QoQ drop in the NPL ratio to 1.1%. NPA coverage improved to 128% from 125% in 3Q23.

• 2024 outlook. Apart from a slightly more optimistic macroeconomic outlook, DBS’ guidance for 2024 was largely unchanged from that shared back during the 3Q23 results briefing (Figure 2). Notably, DBS also guided for a reduced rates sensitivity of SGD9-10m impact to NII per bp change in rates – half of that previously guided. This is due to two factors. The first was a shift in the deposit mix, where the CASA ratio now stands at 53% vs 76% in FY21. This means that a greater proportion of deposits will now reprice lower when rates fall. The second was the adding on of fixed rate duration assets during the quarter (3-year duration assets with yields at 4-4.5%).

• Capital management. Management remains committed to growing DPS by 24 cents pa and thinks this rate can be sustained for the next 2-3 years. Apart from the regular DPS, DBS said there is room for other capital management initiatives such as share buybacks. In our model, we assumed FY24F DPS of SGD2.16, which translates to a payout ratio of 63% based on an enlarged post bonus share base. This translates to a post-bonus yield of 7.3%, which we think is too good to ignore for a large-cap, liquid stock. Also, we think the decoupling of dividends from profitability should help provide downside support to share price.

Source: RHB Research - 8 Feb 2024