DBS Group Holdings Ltd

Good morning everyone and welcome to DBS's fourth quarter and full year financial results briefing. We announced this morning a very strong set of numbers both for the fourth quarter as well as for the full year. So to tell us more, we have with us our CEO Piyush Gupta and our CFO Cheng Sok Hui. Without further ado, Sok Hui please.

Good morning everyone. Welcome to our results presentation. So let me start by explaining two changes to the results disclosure format introduced this quarter. First, for the various income items in a group profit and loss statement, i.e. net interest income, fee income and other non-interest income, we have separated out treasury markets from the rest of the bank, which we label commercial book. The profit and loss items for treasury markets were already previously available in the business unit section of the performance summary, so the information is not new. What the format change does is to improve the transparency of the performance trends of our customer franchise, principally institutional banking and consumer banking and wealth. In particular, rising interest rates are unfavourable for Treasury markets' revenue, booked as net interest income. This is due to higher funding costs for its non-interest bearing and mark-to-market assets, where the returns are shown under the non-interest income line, as well as leading to net interest margin compression for its fixed income instruments. The commercial book, therefore, better represents the underlying net interest income trends of the group. The new disclosure includes the commercial book's net interest margin and interest earning assets, which are additional data to enable the market to understand the key drivers of its net interest income. The revised format is in line with global banks, which have already adopted such disclosure formats for some time. The net interest income drag from higher interest rates incurred by Treasury markets is generally offset by gains in other non-interest income. Hence, there's little economic loss from the drag. It is for this reason that our guidance for Treasury markets has always been on a total income basis. The current guidance is for Treasury and markets total income to average $275 million per quarter or $1.1 billion a year, consistent with previous guidance. The second change is how associate and joint venture income is recorded. Previously, it had been classified under other non-interest income because the amounts were immaterial. Given that Shenzhen Rural Commercial Bank, in which we have a 13% stake, is becoming more material, we are now reflecting associate and joint venture income as a separate line item just above profit before tax in the profit and loss statement. The change in format has a minor impact on the reported cost-to-income ratio amounting to a rise of 0.3 percentage points in the fourth quarter. Performance highlights. We achieved a record performance for full year 2022. Total income rose 16% to $16.5 billion, net profit by 20% to $8.19 billion, and ROE by more than 2 percentage points to 15%. The results were driven by a 21% increase in commercial book total income to $15.3 billion. Its net interest income grew 40% due to a 48 basis point increase in net interest margin to 2.11%, as well as loan growth of 4%. A decline in wealth management and investment banking fee income moderated the results. Treasury markets' total income normalised to $1.17 billion from the record high of $1.5 billion in the previous year, and was in line with the guided run rate. The previous year's record results were due to exceptionally favourable market conditions. Expenses rose 10%, led by higher staff costs. The cost-to-income ratio improved 3 percentage points to 43%. We also achieved record quarterly results for the fourth quarter, which surpassed the previous high in the third quarter. Total income increased 2% to $4.59 billion, net profit by 5% to $2.34 billion, and ROE by 1 percentage point to 17%. Like for the full year, the results were driven by the commercial book, whose net interest income grew 14% from the third quarter as a result of a 31 basis point increase in net interest margin to 2.61%. On an underlying basis, expenses rose 3% from the third quarter and the cost-to-income ratio was unchanged at 41%. Asset quality was healthy. Non-performing assets fell 8% from the third quarter due to repayments, write-offs and currency effects. The NPL ratio fell 0.1 percentage point to 1.1%. Specific allowances were six basis points for the fourth quarter and eight basis points for the full year. Capital and liquidity were also healthy. The CET1 ratio rose to 14.6% while liquidity ratios were well above regulatory requirements. The Board proposed for the approval at the forthcoming Annual General Meeting a dividend of $0.42 per share for the fourth quarter. It also proposed a special dividend of $0.50 per share. The combined payout of $0.92 per share reflects our robust earnings profile and strong capital position. The fourth quarter dividend and the special dividend will bring the payout for the financial full year to $2 per share. Full year total income rose 16% to $16.5 billion. The increase was due to a 21% in commercial book total income. Net interest income grew 40% to $3.06 billion from a higher NIM and loan growth. Fee income fell 12% or $433 million as declines in wealth management and investment banking fees more than offset increases in cards and loan-related activities. Other non-interest income was little changed. Treasury markets income declined 22% or $335 million to $1.17 billion, normalising from exceptional levels a year ago. Expenses rose 10% or $621 million, led by higher staff costs. There was a general allowance write-back of $98 million, $349 million less than the write-back of $447 million a year ago. Specific allowances fell 33% or $164 million. As a result, total allowances were $237 million for the year. Compared to the previous quarter, fourth quarter total income rose 2% to $4.59 billion. Commercial book total income grew 4% to $4.39 billion. Net interest income rose 14% or $416 million as NIM increased 31 basis points to 2.61%. Fee income fell 14% or $110 million from lower wealth management fees due partly to seasonal factors. Other non-interest income declined 31% or $142 million, mainly from Treasury customer sales. Treasury markets' income fell 24% or $65 million due to seasonal factors. Expenses rose 8% or $138 million. They included a non-recurring accelerated depreciation of fixed assets, a one-time special award to all staff, and some expenses for the integration of Citi Taiwan. Excluding these items, expenses rose 3% and the cost-to-income ratio was 41%. There was a general allowance write-back of $116 million due to transfers to non-performing assets, upgrades and repayments. This compared to a charge of $153 million in the previous quarter to buffer against headwinds in the external environment. This resulted in a positive earnings impact of $269 million quarter-on-quarter. Specific allowances were $49 million higher compared to the previous quarter at six basis points of loans, compared to two basis points in the previous quarter. Compared to the previous year, commercial book net interest income rose 40% to $10.7 billion. Compared to the previous quarter, commercial book net interest income rose 14% to $3.41 billion, driven by a 31 basis point improvement in NIM to 2.61%. The NIM increase follows an increase of 45 basis points in the third quarter compared 20 basis points in the second quarter and 4 basis points in the first quarter. As a result, the quarterly commercial book NIM rose 100 basis points during the year. Treasury markets' net interest income declined $561 million compared to the previous year. As explained earlier, the offset is generally seen in gains in the non-interest income line. For the year as a whole, TNM delivered total income of $1.17 billion, and we are maintaining our guidance for total treasury and markets income to average $1.1 billion in the coming year. Combining the commercial book and treasury markets, the group's overall net interest income grew 30% for the full year, and 9% from the previous quarter to $10.9 billion and $3.3 billion respectively. We expect both Group and Commercial Book Net Interest Income, Group NIM and Commercial Book NIM to continue rising in the coming quarters from high interest rates as well as the lag repricing of fixed rate assets. Loans declined by $2 billion in constant currency terms during the quarter. Non-trade corporate loans fell $3 billion. Some corporates shifted their borrowing to markets with cheaper financing options such as mainland China, or used their cash on hand to repay loans they had opportunistically taken when interest rates were low. Underlying loan demand was healthy, as is our pipeline. Trade loans rose $1 billion. Consumer loans were lower as housing loan growth of $1 billion was offset by a decline of $2 billion in wealth management loans. For the full year, loans rose 4% or $14 billion with broad-based growth in non-trade corporate loans, trade loans and housing loans, partially offset by lower wealth management loans. Deposits rose 2% in constant currency terms during the quarter to $527 billion, bringing full-year growth to 7%. Fixed deposits grew 80% or $93 billion during the year. The majority of the growth was in foreign currencies led by US dollars, enabling us to swap less of surplus SingDollar Casa deposits as they continued to earn attractive returns. CASA deposits fell 16% or $60 billion during the year, mostly in the second half, in line with market trends. We continue to have the largest share of CASA deposits in Singapore, with our market share rising 0.7 percentage points during the year, slightly more than 53%. Gross fee income fell 10% from the previous quarter to $835 million. Wealth management fees fell 19% to $262 million, due mainly to seasonal factors. Loan-related fees declined 35%. Transaction service and investment banking fees were slightly lower. Card fees continued to increase, rising 10% to $245 million as travel continued recovering to pre-pandemic levels. For the full year, gross fees fell 9% to $3.70 billion, with declines in wealth management and investment banking fees more than offsetting growth in cards and loan-related fees. Expenses. Fourth-quarter expenses, as mentioned earlier, included an accelerated depreciation of fixed assets, a special award to staff, and expenses for city-Taiwan integration. These non-recurring items totaled about $86 million. Excluding these non-recurring items, expenses rose 3% from the previous quarter, and the cost-to-income ratio was 41%, unchanged from the previous quarter. For the full year, expenses were 10% higher, led by staff costs. The cost-to-income ratio was 43%. Consumer Banking Full-year consumer banking and wealth management income rose 25% from a year ago to $6.65 billion. Income from loans and deposits increased 77% to $4 billion, driven by an improved NIM. This was partially offset by an 18% decline in wealth management investment product income to $1.82 billion. Card income was 5% lower at $717 million, as a lower net interest margin on outstanding balances more than offsets higher card fees. Sing dollar savings deposits fell in line with the market. Over the past 12 months, our domestic market share for savings deposits rose 0.7 percentage points to just over 53%, while our share of housing loans rose 0.3 percentage points to just under 29%. Full-year wealth management segment income rose 20% to $3.27 billion. Weaker non-interest income from lower investment product sales was more than offset by significantly higher net interest income from higher deposit NIM. Asset under management rose 2% or 6 billion in reported terms during the year to 297 billion amid challenging market conditions. In constant currency terms, the increase was 9 billion for the year, including 8 billion in the fourth quarter. The increase in AUM was helped by record net new money flows of 24 billion during the year, of which inflows in the fourth quarter amounted to $9 billion. Full-year institutional banking income rose 28% from a year ago to $7.69 billion. The growth was broad-based, led by cash management and partially offset by lower investment banking income. Cash management income more than doubled to $2.5 billion, driven by higher interest rates and a 6% growth in deposits. Treasury and markets. Fourth quarter, Treasury markets income fell from the previous quarter to $204 million due partly to seasonal effects. Treasury product customer income, which is recorded in IBG and CBG, was also lower at $372 million. For the full year, Treasury markets' total income declined 22% to $1.17 billion, in line with our guided run rate. Lower income from trading interest rates and equity derivatives was partially offset by stronger performance in credit and foreign exchange. Gains from the investment portfolio were also lower. Full year combined, IBG and CBG Treasury customer income fell 3% to $1.65 billion as sales to wealth management customers were affected by weaker market sentiment. The decline was partially offset by higher IBG sales as heightened market volatility resulted in more hedging activity. Hong Kong's full-year net profit rose 19% in constant currency terms to $1.45 billion. Total income increased 16% to $2.92 billion from higher net interest income and trading income. Net interest income rose 30% to $1.84 billion. Net interest margin increased 22 basis points to 1.47% from higher interest rates, with all of the income occurring in the second half. Loans fell 5% in constant currency terms, in line with industry trends. Fee income fell 15% to $672 million from lower wealth management and investment banking fees due to the weak market sentiment. Other non-interest income rose 28% to $407 million from higher trading income. Expenses rose 6% to $1.14 billion from higher staff costs. The cost-to-income ratio was 39%. Total allowances increased to $56 million from $7 million a year ago, as there had been a larger general allowance write-back a year ago. Specific allowances declined. Asset quality continued to be resilient in the fourth quarter. Non-performing assets fell 8% from the previous quarter to $5.13 billion. New non-performing asset formation was more than offset by repayments and write-offs as well as currency effects. The NPL ratio improved from 1.2% in the previous quarter to 1.1%. Specific allowances remain low in the fourth quarter at 72 million or six basis points of loans. For the full year, specific allowances fell 33% to 332 million or eight basis points of loans. Total allowance reserves stood at $6.24 billion, with $2.51 billion in specific allowance reserves and $3.74 billion in general allowance reserves. There was a general allowance write-back of $116 million in the fourth quarter due to transfers to non-performing assets, upgrades and repayments. Allowance coverage was at 122% and at 215% after considering collateral. The CET1 ratio rose 0.8 percentage points from the previous quarter to 14.6%. The increase was due to strong profit accretion, a decline in risk-weighted assets, as well as currency effects. The leverage ratio was 6.4%, which was twice the regulatory minimum of 3%. The Board proposed a final dividend of $0.42 per share, an increase of $0.06 from the previous payout. The Board also proposed a special dividend of $0.50 per share. The total payout of $0.92 per share reflects our robust earnings profile and strong capital position. With the payout, shareholders will receive a total of $2 per share for the financial full year. Barring unforeseen circumstances, the annualised ordinary dividend going forward will rise to $1.68 per share. In summary, we delivered fourth quarter and full year results that reached new highs. The record return on equity of 17% for the fourth quarter and 15% for the full year reflect the benefit of higher interest rates as well as significant structural gains from our decade-long transformation. The commercial book total income growth of 21% for the full year and 43% for the fourth quarter attest to the strength of our franchise. Our pipelines are healthy and asset quality robust. Confidence is returning to markets as interest rate increases, ease, and China reopens. To recap, the Board proposed for approval at the forthcoming AGM a dividend of $0.42 per share for the fourth quarter and a special dividend of $0.50 per share. The combined pair of $0.92 per share brings the total payout for the financial full year to $2 per share. Thank you for your attention. I will now pass you to Piyush. All right.

Thanks, Sakhui. So as usual, I'll talk a little bit about the fourth quarter and then some comments on how we're looking at this year. Sakhui elaborated, so I won't dwell too much on the fact that we did have a record quarter. I mean, income, profits, ROE, Everything is up. She pointed out that the commercial bank NIM is up 100 basis point from fourth quarter 21 to fourth quarter 22, and that's pretty solid. And that results in a – that also includes – I mean, part of that is a 62 basis point increase in group NIM, also quarter on quarter. So I think the NIM has been good. Overall, profits are very solid. I think the thing to reflect on is the ROE. At 17% ROE, we are about 4 percentage points higher than the last time when NIMS were at these levels, when rates were at these levels, which was about 2005, end of 2005. That difference of 4 percentage points reflects structural change in the nature of the bank. It reflects both the change in our income mix as well as some of the outcomes of the transformation agenda that we've laid out over the last decade or so. With the fourth quarter itself, It was a noisy quarter. And so as I talk to the next two, three points, I'm going to point out the noise in the quarter and what you need to try and look through. It was noisy for obvious reasons. I mean, rates had jacked up, and the market was still reacting in a fairly knee-jerk reaction to a new, completely new set of market environment. So first was on the loan momentum. I had actually guided at the end of the third quarter that the loans might come off in the fourth quarter. We'd already started seeing it. And loans did come off. And the reason for that is quite simple, that if you have to pay based on a 4.5% interest rate, then you find ways to pay down your loans or find cheaper sources of borrowing. And we saw that happen in two ways. Companies who've got opportunistic loans, opportunistic in the sense they had cash on the one side, but they'd taken loans just to make sure they had a buffer going through this environment. They used the cash to pay down the loan. There's no point keeping a loan when loan rates are high. The other thing that happened in some cases, especially at Chinese customers, they found it cheaper to borrow onshore instead of borrowing offshore because the onshore rates are cheaper. And so we gave up some loan growth because of both of these phenomena. When I say look through the noise, the good news is that the underlying non-trade loan growth momentum continued to be quite strong. We saw loan growth across multiple industries. TMT was soft because the cycle's coming off, but property was strong, energy was strong, logistics was strong. The China plus one capex cycle is coming through. The deal flow is strong, M&A. So underlying loan growth is actually quite robust, notwithstanding the fact that the quarter itself showed a little bit of a decline. You can also see that our market shares in Singapore for everything were up. For consumer loans, corporate loans, everything on our market shares were up. On fee income again, we've got to look through the noise. Cards was at a quarterly record, but I think there is still more tailwind. Travel as a percentage of car spend is now up to about 11% for the quarter. It used to be 15% pre-COVID. So we're still not back. And as China opens up, I expect the travel component of the car spend to continue to increase. So we'll get some tailwind from there. Wealth management fees were lower. And that's again back to as rates go up, not only do loans come down, People aren't taking margin financing at these rates. But the markets themselves were badly hit. And as a consequence of that, animal spirits were low. Nevertheless, as I said, look through it. Our net new money was the highest we ever had. We got $24 billion for the year, $9 billion plus in the fourth quarter alone. And a lot of this money is now there for dry powder. It's waiting on the sidelines, waiting to be invested. I'll talk about it in the outlook. But we're already beginning to see green shoots on the back of that. Expenses. This is the third place. This is not to do with market. This is to do with us internally. But there is some noise in the expense numbers. we took the opportunity to do accelerated impairment of about $50 million, $60 million in our technology spend. As you know, we've been spending on technology over the years, and it's several billion dollars of investment, so $50 million is not a big number. But we took the opportunity to take some of the technologies we put into place that don't seem to be that effective, and we basically written them off. We also did a one-time payment to staff as a year-end recognition for the environment and what we've done. So basically some one-timers in that number. Asset quality is very resilient. It continues to be very strong. As you can see, our NPAs continue to come down. They're down to 1.1%. And the interesting thing was, you know, in third quarter, we buffered up. We took management overlays to buffer up our GP to take it back to the beginning of the year level. As things happen, the portfolio continues to improve. So in the fourth quarter, we saw more repayments, we saw more upgrades, and as a consequence, we saw a reversal from GPN. Some of these are model-driven, so you've just got to let the numbers flow. But the asset quality is looking very, very good. And net, finally, as we promised earlier, the board took stock of our dividends, and we're pleased that we've been able to increase our total payout for the quarter to $0.92, including the $0.50 special So the full year dividend payout is $2 per share, which is obviously quite attractive. So some quick comments on the outlook. So my view is I think you see a couple of more rate hikes. I think the Fed will get to 5.25. I could say they could stop at 5, but somewhere 5, 5.25. And I don't see them cutting rates this year. I think inflation will come off. Our own projection is inflation will come down. By the year end, to the plus-minus 3% level. But even at 3% handle, I don't think the Fed will be precipitated about cutting rates. So the rest of our outlook is really based on that assumption, that you get rates at that level, but rates don't get – you get inflation at that level, but rates don't get cut. So what does it mean for our business? We're maintaining our guidance for mid-single-digit loan growth and double-digit fee income growth. I think China's opening up will help the environment a little bit. As we go into first quarter, we're seeing that momentum. It is still there. Business volumes are good, and loan growth is quite robust. The area we'll see some headwinds is the mortgage book in Singapore. Last year, that book grew between 2.5 and 3, 2.8, if I remember, billion dollars. This year, I expect that to be only half, because mortgage bookings have slowed down a lot in the last quarter with the new policy changes in September. But nevertheless, I think mid-single-digit loan growth is very much on the cards. On NIM, though, we think earlier I guided that we could see NIM peaking at about 225. I think we'll be off by five, seven basis points from that earlier guidance. And there's some headwinds and some tailwinds. The headwinds are really, one, the T-bills issued by the government at very attractive rates. They went up to 4.5%. They're still at about 4%. That's a factor we're not taking into account when we were doing our modeling earlier. a lot of money has flowed out of the system into the T-bills. Now, our own assessment is that the T-bills, by May, new money will not go in. It starts recycling. But for the first quarter, three, four months, you will continue to see some impact of that. Second, SING dollars strengthen much faster than people expected. And a strong SING dollar obviously means the pass-through rates from Fed policy dates into SING dollar tend to be lower. And finally, as Sokhi pointed out, one of the reasons we've represented the Treasury book and the commercial book is to point out the Treasury book funding costs actually have an impact on the NIM line. It doesn't mean anything for income, because you fund at a higher cost, but you make it up below the line on other income. Nevertheless, on the optics of NIM, it has a bigger drag than we'd originally forecasted. What are the tailwinds? The tailwinds really... is that we have about $180 billion of book which is still repricing, of asset book and loan book. Of that, about half will reprice in the next two years, the 23 and 24, two years, and the other half carries on for the next three years. You know, it's going to play five, overall duration will carry on to five years. So obviously that helps, that, you know, we will continue to see upside from the repricing of assets. Our own assessment is that while peak NIV will probably therefore be a tad below 220,000, our average NIM for the year will be north of 210. And so that's not bad. I think that the tailwind means that we will have a greater stability in our NIM as we look forward. On cost, we've kept the guidance unchanged at between 9% and 10%. I actually think there is some upside to that. I think cost could come in slightly better than that 9% level. Nevertheless, also, we have some levers. If it turns out that We are wrong or there's some unusual uncertainty in the income side. We always have the capacity to tighten the belt. So our cost-income ratio should be securely below 40% for the year. Finally, SPs. In the last quarter, I guided for SPs. I said we should assume normalized SPs, which we now think is 15 to 20 basis points. And the reason I said that is because rates are going up. So nobody knows what the impact of that might be on parts of the portfolio, particularly the SME portfolio. By the end of the year, it's quite clear that things are not looking that bad. SME book is actually looking quite robust. The consumer book is looking robust. We're not seeing any material signs of weakness in any of our portfolios anywhere. And so we're bringing the guidance down to 10 to 15 basis points. And frankly, even that, there might be some upside to the 10 to 15 basis points number. As you know, this year it was only eight basis points. So the reason we're saying 10 to 15 is not because we have any insight. It's just because these high interest rates, you should expect to see some more uncertainty. The other positive we have, though, is that we have still that over $2 billion of management overlay buffer we haven't touched. And so if we do see some idiosyncratic risk in the course of the year, we will be able to address it from the GP. We won't have to take it down to the bottom line. So why don't I stop there and take some questions.