Yahoo Finance DBS has sufficient capital for growth and dividends, with no stress in CRE book
DBS has sufficient capital for growth, maintaining dividends of 54 cents per quarter, and special dividend in the future
The fallout from US, UK and German commercial real estate, in particular office (to which local companies and REITs are exposed), is unlikely to have much impact on DBS Group Holdings’ credit costs or impairments this year. During a results briefing on Feb 6, DBS group CEO Piyush Gupta said DBS’s exposure to commercial real estate “is about $90 billion”.
“That includes a big chunk of mixed projects comprising retail, residential and office. Singapore accounts for $52 billion or 60% of the total commercial real estate exposure, and the market is quite robust. Hong Kong accounts for $18 billion or 20%, down from $19 billion last quarter, with $13 billion mixed use and the remaining $5 billion equally split between retail and office,” Gupta continues.
In Hong Kong, DBS’s commercial real estate exposure is to top-tier names, the likes of CK Asset, Henderson Land and the like. “We have no concerns about the Hong Kong portfolio. The average loan-to-value for our portfolio is below 60%, giving us a lot of cushion. More importantly, the financials of the big Hong Kong names are solid. We carry out valuations every year and more frequently if needed. We have not had to take any valuation adjustments,” Gupta elaborates.
“There was some noise on New World, but after their capital raising, that noise is gone because they had enough money at the parent level. For the rest of the portfolio, we have done some very detailed kicking of the tires, on both the property and the corporate balance sheet,” he adds.
The US accounts for $1 billion, which is to Singapore names, with another $8 billion collectively in Australia and Europe including the UK which are also to Singapore or Asian names. ”For China, our total real estate exposure is $14 billion, down from $16 billion previously. The commercial real estate component is $7 billion, most of which is mixed. Of the $14 billion, $5 billion-$6 billion is to state-owned enterprises, $4 billion to foreign companies such as CapitaLand equivalents, and $4 billion equally split between REITs and privately-owned companies. Like everybody else, we have been stress testing our commercial real estate book, but we are not seeing any problems with it,” Gupta says.
Higher dividends likely
As for whether DBS has sufficient capital for growth and its stated increase in base dividends, the answer is a definite yes.
“Higher dividends do not constrain our growth. We have got the reverse problem because we have too much capital with CET-1 at 14.6%. With the Basel IV regime, we have even more excess capital during the transitional period. Frankly, we have enough to do more M&A if we want and still have the capacity to grow. At this point in time, India is the only country we are putting new capital in. Everywhere else is self-sufficient and generating capital,” Gupta says.
Chng Sok Hui, group CFO, DBS, says: “We guided previously that under Basel IV, which will come into effect on July 1, 2024, our CET-1 will go up by two percentage points on a transitional basis, which is the number required for regulatory compliance.”
In FY2023, including interim dividends of $3.557 billion, DBS paid out $4.95 billion, a tad less than 50% of its net profit.
The fourth-quarter dividend of 54 cents per share brings full-year 2023 dividends to $1.92 per share. This represents a 42-cent or 28% increase compared to 2022's ordinary dividend payout. Assuming dividends are held at 54 cents per quarter, annualised dividends will be $2.16 per share.
“The 1-for-10 bonus issue will further boost the payout. The bonus shares will qualify for dividends starting with the first-quarter 2024 interim dividends, and 54 cents per quarter will apply to the enlarged share base, effectively raising the quarterly dividend of 54 cents by another 10%. On an annualised basis, the post-bonus dividend would be 24% higher than 2023's payout of $1.92 per share,” Chng describes.
“We should be able to sustain the 24-cent per year increase for two to three years. It is not just payout from earnings for the year, but there is also an element of a capital return from the stock position as we currently have a CAR ratio that is quite high,” she adds.
“We will continue to maintain a baseline $0.24 annual dividend per share increment over the enlarged post-bonus share base. I think we could also do special dividends or other forms of capital returns. We will have greater clarity in the middle of the year when there is better line of sight on interest rates and, hopefully, when the technology issues are behind us,” Gupta indicates.
NII, NIM, fixed-rate assets
During the media briefing on its FY2023 results, Gupta guided that net interest income (NII) is likely to stay at F2023’s level of $13.62 billion (comprising commercial book NII of $14.286 billion and treasury NII) as net interest margins (NIM) could ease from 4QFY2023’s 2.13% level (-6 bps q-o-q). FY2023 NIM was 2.15%.
As at Dec 31, 2023, DBS had loans of $418 billion and total assets of $739 billion. Total assets include high-quality liquid assets (HQLA) such as US and Singapore government securities and T-bills which are locked in at higher yields.
“We have about $40 billion of fixed-rate assets repricing this year which will get a yield uplift of about 1.7%-1.8%, this equates to about $400 million. We have added $30 billion plus of duration, locking in yields around the 4.5% level for the next two, three years,” Gupta says. In addition, the full impact of Citi Taiwan is likely to lift income by $200 million.
In FY2023, DBS announced a net profit of $10.28 billion, which, accounting for a one-off non-recurring expense for its Citi integration, and a recurring $100 million corporate social responsibility (CSR) commitment, works out as $10.06 billion, up 23% y-o-y. Total income grew 22% y-o-y to $20 billion on the back of higher NIM, a rebound in fee income and record treasury customer sales. ROE rose to 18%, a new high, from 15%.
During the course of 2023, DBS did not announce any writebacks. Specific allowances rose $177 million to $512 million or 11 bps of loans. General allowances of $78 million were taken compared to a $98 million write-back in FY2022.
However, its management overlay of $2.2 billion, and allowance coverage of 128% which sits comfortably above 100% indicate that DBS is very conservative in its coverage, stress testing and its macroeconomic variable modeling.
In 3QFY2023, DBS announced that specific allowances of $197 million or 18 bps of loans were taken as “allowances for exposures linked to a recent money laundering case in Singapore”. Gupta confirmed that shophouses linked to the case are up for sale.
“On the shophouses related to the anti-money laundering (AML) case, our loan-to-values are very low. Just like in normal cases, when there are repayment issues, we foreclose the property and sell it to recover our loan. We were being conservative when we decided to provide for it. If we can sell the properties, we should recover the provisions,” he says.
Analysts, for the most part, have retained their previous recommendations. Goldman Sachs maintains a sell and CGS a hold. UBS maintains its buy recommendation.
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