DBS posts record $2.57 billion Q1 profit, says net interest margins have peaked

SINGAPORE – DBS Group Holdings on Tuesday reported record quarterly earnings driven by higher interest rates, but flagged that profit margins from the high rates have peaked.

Still, business momentum is expected to remain healthy, with “some pockets of moderation”, chief executive Piyush Gupta said at a briefing on the bank’s results.

Net interest margin (NIM) – a key gauge of a bank’s profitability – compares the interest income it generates from credit products like loans and mortgages, with the outgoing interest it pays out, such as to savings accounts or fixed deposits.

DBS’ NIM rose 66 basis points to 2.12 per cent in the first quarter of 2023, from 1.46 per cent in the same period a year ago.

This propelled the net profit of the largest lender in Singapore and South-east Asia to $2.57 billion in the first quarter, up 43 per cent from a year ago and topping the $2.01 billion forecast by analysts in a Refinitiv poll.

Likewise, local rival UOB last week posted a

67 per cent surge in first-quarter net profit

to a record $1.5 billion. OCBC will report its results on May 10.

Mr Gupta said NIM likely peaked in the first quarter, with the US Federal Reserve coming to the end of its rate-hiking cycle, but the decline in NIM is likely to be gradual, with the full-year margin forecast at 2.05 per cent to 2.1 per cent.

The bank’s cost of funding will go up as the higher rates continue to pass through to deposits in the rest of the year, he added.

Mr Gupta expects loan growth to come in at 3 per cent to 5 per cent in 2023, comparable with his previous forecast for mid-single-digit growth.

But he said that with the April 27 hike in residential property stamp duties, DBS might not be able to close in on its target of growing housing loans by around $2 billion in 2023.

“We have to wait and see what the impact of the new measures is,” said Mr Gupta, adding that it helps that 88 per cent of the bank’s mortgage customers are first-time buyers who are not impacted by the policy changes.

There has also been a slowdown in margin loans, as investors would rather put their own money to work instead of borrowing from the bank amid high interest rates, he said.

DBS said asset quality remained resilient, with its non-performing loan ratio improving to 1.1 per cent, from 1.3 per cent a year ago.

Nonetheless, it set aside $99 million in general allowances, compared with a year ago when it wrote back or restored to profit $112 million.

Mr Gupta said the bank was being “abundantly prudent and cautious in case there is some stress that comes out of the (high interest rate environment) in the later part of the year”.

DBS’ corporate loan growth in the first quarter was led by Singapore real estate acquisition financing. There was also a recovery in fee income and strong net new money inflows.

Its commercial book’s first-quarter net interest income rose 69 per cent year on year to $3.38 billion, boosted by higher interest rates.

Meanwhile, net fee income from the commercial book fell 4 per cent from a year ago to $851 million.

Wealth management fees, the largest component of fee income, plunged 11 per cent due to a high base in January 2022. This was before the Ukraine war and interest rate hikes to dampen high inflation took a toll on wealth management activity, noted chief financial officer Chng Sok Hui.

But Mr Gupta noted that fee income rose in February and March, compared with the same months in 2022, reversing year-long declines.

Card fees grew 21 per cent year on year in the first quarter from higher spending, including for travel, while investment banking fees rose 2 per cent.

Deposits rose 4 per cent, or $20 billion, as the bank benefited from a flight to safety amid bank failures in the United States and Europe.

Net new money inflows doubled to $3.6 billion in March, compared with a monthly average of $2 billion in 2022, said Mrs Chng. These inflows came up to a total of $6.2 billion in the first quarter.

Mr Gupta added that some of these inflows came from the troubled US banks and Credit Suisse, “but it’s hard to unravel how much comes from where”.

Asked about the impact of Credit Suisse’s collapse, Mr Gupta said DBS clients held around $140 million of the Swiss bank’s Additional Tier 1 bonds, whose value was erased in its takeover by UBS, a small fraction of the bank’s $309 billion in total assets under management.

The bank’s board declared a dividend of 42 cents a share for the first quarter, up from 36 cents a year ago.

Singapore bank stocks rose on Tuesday. DBS closed 0.4 per cent higher at $32.95, while OCBC climbed 0.6 per cent to $12.66 and UOB gained 0.1 per cent to $28.26.