Singapore’s largest lender DBS Group Holdings Net interest income is expected to decline in the future, but the bank is confident it can ride on other drivers going forward, such as growth in loan and fee income.
DBS reported this on Tuesday record revenue and net profit for the first quarter. Revenue came in at S$4.94 billion ($3.7 billion), up 34% from a year earlier, while net profit came in at S$2.57 billion, up 43% from the same period last year.
DBS said this was due to “high net interest margin, sustained business momentum and resilient asset quality”. Net interest margin, or NIM, increased 66 basis points year-over-year to 2.12%, compared to 1.46% in the first quarter of 2022.
Net interest income is a measure that compares interest income generated from credit products such as loans and mortgages with outgoing interest such as savings accounts or fixed deposits.
Speaking to CNBC”capital connectionDBS CEO Piyush Gupta said the NIM has “probably peaked around these levels” – around 2.1% for February to April.
Despite saying that the upside from these levels would be limited, Gupta said that he expected the pace of the decline to be very gradual and would not be “falling off a cliff”. DBS guided for NIM in 2023 to average between 2.05% and 2.1% for the full year.
Geoff Howie, market strategist for equities at the Singapore Exchange, agreed with Gupta’s view, adding that an increase in NIM will become more difficult as interest rate hikes, especially from the US Federal Reserve, begin to ease.
Speaking to CNBC”Street Signs AsiaHowie said, “From a net interest margin perspective, how can you say 475 basis points of fed funds increases over 13 months or more?”
Rising rates typically boost bank income by allowing banks to raise rates on loans, while interest costs to banks – such as payments on deposit accounts – may remain unchanged.
He added that in 2022, net interest income for Singapore’s three major banks is set to increase by about 30%, but as NIMs are “consolidating to some extent”, it will be difficult to continue this pace of growth.
Howie explains, “You had nine consecutive quarters of quarter-to-quarter net interest income growth, which may be the end of it for a while, [and] We expect some consolidation in net interest income.”
In light of the results, the company’s board also declared a dividend of 42 Singapore cents per share for the first quarter, up from 36 cents in the same period a year ago.
DBS shares rose 1.37% on Tuesday following the results.
other growth drivers
While Gupta sees net interest income growth decelerating, he said the bank is still seeing “healthy business momentum”. He added that despite the slowdown in the West, growth forecasts for Asia are still “pretty strong”.
He added that “two quarters ago, everyone was pretty sure there would be a recession [in the West] , and now the jury’s out on whether they can really survive the recession. So we think the downturn is not going to be catastrophic.”
Gupta said he sees supportive fundamentals in Asia, “demographics are good, infrastructure spending is picking up, trade and intra-Asia trade remains strong, wealth management remains very strong”.
As such, he said these drivers are meant to help keep DBS moving “fairly decently”.