DBS’ : D05 0% recent earnings for the fourth quarter ended Dec 31, 2022 have drawn mixed reactions from brokerages, despite the bank posting record Q4 profits.

UOB Kay Hian (UOBKH) lifted its target price on the stock to S$45.80 from S$45.35, upon raising its earnings forecast by 2 per cent for FY2023 to factor in lower specific provisions. The new target is based on 2.03 times its FY2023 price-to-book ratio.

RHB Research also raised its target price for DBS to S$42 from S$41.10, upgrading its FY2023 to FY2024 earnings projections by about 4 per cent, accounting for lower provisions as well. The revised target further includes a 4 per cent environmental, social, and governance premium.

On the other hand, CGS-CIMB lowered its target price to S$35.70 from S$36.50, after reducing the bank’s FY2023 to FY2024 earnings per share estimates by up to 7 per cent on anticipated funding cost pressures.

The brokerages’ moves were based on opposing views on the bank’s ability to continue expanding its net interest margins (NIM).

In a report on Tuesday (Feb 14), UOBKH analyst Jonathan Koh maintained a “buy” call on the stock while noting that the bank’s net profit forecasts came in above expectations. 

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Koh believes the bank will continue to see NIM expansion after growing a “sizeable” 62 basis points year on year to 2.05 per cent in Q4 FY2022, due to higher interest rates. 

The analyst was also confident in DBS’ recent growth from treasury income and investment gains, its stable asset quality as well as the fact that its return on equity reached a new quarterly high.

“Many family offices and high-net-worth clients are looking to deploy their funds to generate higher returns,” Koh said, adding that wealth management is recovering.

In his view, DBS’ management appeared more inclined to increase its regular quarterly dividend, although the bank does not rule out other avenues of returning capital to shareholders, including special dividends and share buyback.

RHB Research, which also maintained its “buy” call on DBS, highlighted the bank’s NIM expansion, resilient asset quality and special dividend as key standouts in FY2022.

With credit cost now expected to be lower than previously guided, RHB believes the bank’s robust topline growth will lift FY2023 earnings by a healthy 27 per cent to boost its share price even higher. 

Unlike UOBKH, RHB is expecting DBS to experience weaker NIM from its treasury markets segment.

Citing continued funding cost pressures, CGS-CIMB foresees NIM stabilising in FY2023 and maintained a “hold” call on DBS.

CGS-CIMB analysts said DBS’ lower peak NIM expectations are likely due to higher funding cost pressures from an outflow of current accounts and savings accounts, into instruments such as Treasury bills offering competitive yields.

While they expect DBS to be a key beneficiary of the continued rise of Federal Reserve rates, they said this has already been priced into the stock. 

According to CGS-CIMB, a corresponding rise in funding costs could cap NIM expansion, while earnings upsides from a pickup in wealth management could take time as rates stay higher for longer. 

Therefore, the analysts trimmed their FY2023 to FY2024 NIM forecasts for DBS to about 2.17 per cent, from 2.28 per cent previously.

Key trends, such as the redeployment of wealth clients’ funds amid market volatility, tailwinds from China’s reopening and a pickup in deal momentum, could nonetheless steer DBS’ cost-to-income ratio to below the management’s 40 per cent target for FY2023, said the analysts. 

“FY2023 credit costs could remain historically low, but the lagged impact of the higher rate environment is yet to be seen,” they added.

Shares of DBS closed at S$35.06, down 0.74 per cent or S$0.26, on Tuesday.