DBS's digital prowess could drive more efficient business processes over the longer term: CGS-CIMB

The analysts raise their FY2023-FY2025 DPS estimates to $1.98-$2.22.

CGS-CIMB Research analysts have raised their estimates for DBS Group Holdings’ D05 FY2023-FY2025 dividend per share (DPS) to $1.98-$2.22, upon incorporating the bank’s guidance for dividend growth.

Analysts Andrea Choong and Lim Siew Khee note that on its investor day on May 22, DBS highlighted its efforts and investments in digitalisation, which have contributed to its ability in delivering return on equity (ROE) of about 15% in FY2022.

Among others, the bank’s digital transformation efforts enabled it to attain a higher Singapore dollar savings market share, growth in high-ROE fee income, as well as new capabilities in credit risk management.

In view of these initiatives, DBS outlined its expectations of at least $10 billion in earnings and about 15%-17% ROE in the medium term. The bank also outlined its baseline dividend growth target of about 24 cents per year, translating to DPS of $1.98 in FY2024 and payout ratio of about 52%.

DBS targets 12.5% to 13.5% common equity tier 1 (CET1) operating range in the medium term, translating to about $3 billion in excess capital. Its distribution could be through further DPS step-up, special dividend or buyback, the analysts point out.

Put against its ROE of 18.6% in 1QFY2023, DBS’s ROE guidance translates into sequentially softer earnings to come. Choong and Lim believe factors that could result in ROEs trending towards the lower end of its guidance are Fed rates declining to below 3%; specific provisions rising to about 18 basis points; and higher taxes due to a broader international move to align minimum global corporate taxes at around 15%.

Meanwhile, factors that may offset these headwinds and provide ROE uplift towards the higher end of its guidance are improvement in its growth markets; faster growth in capital-light high-ROE businesses such as wealth management and global transaction services; capital management of its 14.4% CET1; as well as releasing $2 billion in management overlays if asset quality fears are unfounded.

Although the analysts are convinced that DBS’s digital prowess could drive more efficient business processes over the longer term, Choong and Lim reiterate their “hold” call with an unchanged target price of $35.30. This is due to the bank’s peaking net interest margin and its greater sensitivity to Fed rate cuts.

As at 10.41am, shares in DBS are trading 15 cents lower or 0.47% down at $31.34.

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