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DBS maintains dividend rate despite a 29% drop in Q1 2020 profit

The financial services group’s share price rose 1.1% to S$20 per share - a two-month high - despite a 29% decline in Q1 net profit.

Source: Bloomberg

How did DBS fare in the first quarter of 2020?

Singapore money lender DBS Group reported a net profit of S$1.17 billion for the three months ended 31 March 2020 (Q1 2020), a 29% decline from a year ago. This is slightly above the S$1.13 billion estimates given by Refinitiv analysts.

Southeast Asia’s largest financial services institution attributed this drop in income to higher loan-loss provisions that it has ‘pre-emptively set aside’ for potential loan risks in light of the Covid-19 pandemic.

This latest charge – equating to a further S$703 million – raised the amount of general allowance reserves for this quarter by 29% to S$3.23 billion, as the bank sought to fortify its balance sheet.

Total income grew 13% from a year ago to a new high of S$4.03 billion, on the back of healthy broad-based growth in non-trade corporate loans and fee income, and gains from investment securities.

Following the Q1 results release, IG data showed that DBS Group’s share price rose 1.1% to S$20.02 per share – its highest level since early-March – within the first 30 minutes of trading on Thursday 30 April 2020.

The average share price target for DBS based on five analyst estimates is S$22.338 per share. Of these, two have rated the DBS stock a ‘buy’.

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DBS Q1 2020 dividend maintained from previous quarter

The group’s Board of Directors has declared a quarterly dividend per share (DPS) of S$0.33 for Q1 2020, unchanged from the previous quarter, but higher than Q1 2019’s DPS of S$0.30.

The total estimated interim dividend payable is S$838 million, with payment to be made on 26 May 2020.

Group CEO Piyush Gupta said in the Q1 presentation that the company’s current earnings generation is ‘expected to be sufficient for maintaining the quarterly dividends per share at S$0.33’.

From an operations standpoint, Gupta stated that business volumes remain strong, as productivity stayed at a high level with the bank’s seamless transition into remote working across all functions.

Its recent roll out of digital capabilities – including more self-service online options on the IDEAL platform (which has seen a 28% growth in year-on-year use), more account opening services for migrant workers (over 35,000 account opened in less than two weeks), and customer chatbots regarding the bank’s Covid-19 relief measures – have also allowed operations to stay undisrupted.

Outlook: interest rate cuts are 'main pressure to 2020 earnings'

Gupta said that Q1’s profit before allowances growth of 20% ‘has given us a head start to face the challenges of the coming year’, as it ‘provides capacity to absorb expected increase in allowances’.

He forecasted that full-year profit before allowances for 2020 will be around 2019 levels, even after factoring in declines caused by Covid-19.

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However, he cautioned that interest rates will likely have the biggest impact on overall earnings from Q2 onwards as a result of the recent interest rate cuts by central banks, which were not reflected in the latest Q1 report.

For this past quarter ending 31 March 2020, net interest income increased 7% from a year ago and 2% from the previous quarter to S$2.48 billion, while net interest margin dipped slightly from the previous quarter’s 1.88% to 1.86%.

Gupta also reiterated a statement from earlier this month that the company has no plans for retrenchments and pay cuts. However, he said the bank is ‘hiring judiciously’.

He added that business expenses will be tightened, citing a reduction in discretionary non-staff costs like travel, a prioritisation in investments, and an alignment of staff bonuses to earnings.

‘While the economic outlook remains uncertain and credit risks have increased, the digital investments we have made have strengthened the resilience and efficiency of our franchise and we remain committed to serving our customers. We will maintain a solid balance sheet with ample capital, liquidity and loss allowance reserves that give us strong buffers to absorb external shocks,’ Gupta said.

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