DBS Group (SGX: D05) is the last of the big three local banks to report its fiscal 2022 first half (1H2022) earnings.
Last week, United Overseas Bank Ltd (SGX: U11) reported a net profit of S$2 billion for 1H2022 while peer OCBC Ltd (SGX: O39) announced a record net profit of S$2.8 billion for the same period.
DBS reported a mixed quarter as better net interest income was offset by lower overall fee income.
Despite this, its second quarter (2Q2022) net profit hit S$1.82 billion, its second-highest on record.
Here are five interesting highlights from Singapore’s largest bank.
1. A mixed report card
For 2Q2022, the bank saw its net interest income rise 17% year on year to S$2.45 billion from higher interest rates and a stronger loan book.
Net interest income was also 12% higher than the previous quarter’s S$2.19 billion.
However, net fee and commission income fell by 12% year on year to S$768 million while other non-interest income declined by 10% year on year.
Overall, tTotal income still rose 6% year on year to S$3.8 billion, and profit before allowances crept up 4% year on year to S$2.1 billion as expenses increased by 7% year on year.
Net profit grew 7% year on year to S$1.8 billion, and annualised return on equity for the lender stood at 13.4%, up from 12.7% in 2Q2021.
For 1H2022, total income inched up just 1% year on year to S$7.5 billion, but profit before allowances saw a slight 2% year on year dip due to higher expenses.
Net profit slid 3% year on year to S$3.6 billion from the record-high chalked up in 1H2021.
2. Improved NIMs
DBS finally saw its net interest margin (NIM) rise after three consecutive years of decline.
For context, 1Q2022 saw NIM inching up to 1.46% from the low of 1.45% in the previous quarter.
The momentum accelerated in 2Q2022 with NIM clocking in at 1.58%, up 0.12 percentage points.
As a whole, for 1H2022, NIM stood at 1.52%, up from 1.47% a year ago.
CEO Piyush Gupta has reported a sanguine outlook as interest rate increases translate to earnings upside in future quarters.
For every 0.01 percentage point rise in interest rates, DBS will see a net interest income uplift of approximately S$18 million to S$20 million.
The good news is that July’s NIM is above 1.8%, pointing to further upside for the lender’s net interest income.
3. A stronger loan book with lower provisions
Customer loans grew 7% year on year in 1H2022 from S$396 billion to S$424.5 billion.
The increase was contributed by non-trade corporate loans and trade loans.
DBS’s guidance for loan growth for 2022 has been maintained at a mid-single-digit percentage, with the bank’s base case assumption that inflation will be tempered and that there will only be a mild recession.
Meanwhile, for 2Q2022, provisions declined by 42% year on year to S$46 million and the non-performing loans (NPL) ratio remained stable at 1.3% as new NPLs stayed low.
Specific allowances stood at just 0.11% of total loans for 1H2022, down from 0.18% for 1H2021.
4. A bout of weakness for fee income
Fee income, though, encountered a bout of weakness during the quarter due to volatile market conditions.
Gross fee income declined 10.3% year on year to S$917 million for 2Q2022, led by a fall in wealth management fees and to a lesser extent, investment banking fees.
The latter dipped from S$49 million to S$30 million while the former fell by 17.4% year on year to S$337 million.
Card fees, however, mitigated the overall decline with an 8.6% year on year rise to S$203 million as consumers spent more with the reopening of borders.
Despite the weakness, DBS believes that fee income is likely to have bottomed in 2Q2022 and should head up in future periods.
5. A slightly higher interim dividend
DBS has upped its interim dividend by 9.1% year on year to S$0.36 for 2Q2022.
For 1H2022, the total dividend comes up to S$0.72, with the trailing 12-month dividend coming in at S$1.41.
The bank’s shares offer a trailing dividend yield of 4.4%.
Get Smart: Better days are ahead
DBS has posted an encouraging outlook – it not only expects full-year loan growth but also believes fee income may have bottomed in 2Q2022.
The lender’s cost-to-income ratio is also set to improve towards 40% (2Q2022: 43.7%).
With July NIM already at 1.8% and the prospects of the US Federal Reserve hiking rates further, DBS should enjoy a strong net interest income uplift in future quarters.
The bank did caution that aggressive rate hikes may lead to a significant Asian slowdown while China also presents risks to its growth.
Investors need to be mindful of these risks but should feel confident that DBS can weather them successfully.
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Disclaimer: Royston Yang owns shares of DBS Group.