Record performance amidst macroeconomic uncertainty and financial market volatility reflects fruits of pervasive transformation

We achieved another record performance in 2022 as net profit rose 20% from a year ago to SGD 8.19 billion. Return on equity climbed to 15%, pulling away from previous highs clustered around 12-13%. The results were driven by a 16% increase in total income to SGD 16.5 billion, which passed the SGD 16 billion mark for the first time.

Underpinning the growth was a 30% increase in net interest income to SGD 10.9 billion, boosted by a higher net interest margin as interest rates rose, as well as loan growth. Non-interest income was 3% lower than the previous year’s record due to financial market volatility. Lower wealth management and investment banking fees as well as gains on investment securities were offset by growth in other fee income activities and net trading income.

The significant jump in our results reflected the pervasive digital transformation we have been making to our franchise for more than a decade. Average interest rates for the year were closer to the years before they were cut to near-zero over the previous two years, enabling the results of the transformation to become more apparent.

Our digital transformation has become more entrenched since we first spoke about it in 2017. For wealth management and retail customers, we have been enhancing our digital platforms and increasingly using data and artificial intelligence to provide them with the tools and insights to manage wealth on their own. We have also made it more convenient for them to carry out payments for everyday activities. For corporates, which already use our cash management platforms for collections and payments, we have employed application programming interfaces (APIs) to embed ourselves into customer flows and scale up supply chain financing. In Treasury Markets, digitalisation has enabled us to handle higher volumes with faster turnaround times, improve trading efficiency and strengthen risk management.

The upshot of all this has been even stickier and deeper customer relationships, greater income per customer and lower unit cost of serving them. A few specific outcomes of the transformation were pertinent to the year’s performance.

First, by cementing our status as customers’ primary bank, we were able to attract – and, crucially, retain – low-cost current and savings account (Casa) deposits. During the period of quantitative easing in 2020-21, our Casa deposits had risen by 60% or SGD 143 billion to SGD 381 billion, a significantly higher percentage growth than peers despite starting from a much larger base. While Casa deposits did flow out in the second half as expected as interest rates rose, half of the earlier inflows did stay with us, and we ended 2022 with Casa deposits of SGD 318 billion. The expanded Casa base enabled us to enjoy higher leverage to rising rates than in prior years, which contributed to the strong total income growth.

Second, several fee income activities were structurally larger. Credit and debit card billings rose by double-digit percentage terms for a second consecutive year, reaching new highs as our consumer payments platforms captured the post-pandemic spending recovery. Transaction service fees were propelled by higher domestic and cross-border payment volumes as well as new customer mandates. Compared to 2017, fee income from cards and from transaction services were around 50% bigger. Even wealth management fees, which declined 26% in 2022 due to financial market volatility, remained two-fifths larger than five years ago. The cumulative five-year growth rates of these fee income activities were above peers.

Third, the Treasury Markets business delivered both strong growth and higher returns over the past five years. Income from trading and customer sales was two-fifths larger than in 2017.

The digitalisation of our business also meant greater operating leverage as an incremental dollar of income could be generated with lower incremental unit cost. The full-year cost-income ratio improved three percentage points from a year ago to 43%. The second-half underlying ratio was 41%, in line with the longer-term target of around 40% that we had indicated several years ago.

Sustained business momentum augmented by higher net interest margin in 2022

During the year, net interest income and net interest margin increased at an accelerated pace as the year progressed. Net interest income grew 11% in the first half and 48% in the second half compared to the year-ago period, resulting in a full-year increase of 30% to SGD 10.9 billion.

Net interest margin rose 30 basis points to 1.75%, with majority of the increase occurring in the second half when the impact of interest rate increases was more fully felt. The biggest quarterly increase in net interest margin occurred in the third quarter as cumulative Casa outflows and higher deposit costs moderated the increase in the fourth quarter. The deposit beta – or the increase in overall deposit costs relative to market interest rates – rose progressively during the year to 32% by year-end. Still, net interest margin was 2.05% in the fourth quarter, significantly above the 1.75% for the full year.

The reported net interest income and net interest margin were affected by a drag from Treasury Markets due to higher funding costs for non-interest-bearing and marked-to-market assets as well as net interest margin compression for fixed-income instruments. (The drag is neutralised by gains in other non-interest income and so does not affect its overall income and earnings.) Net interest income for the Commercial book, which excludes Treasury Markets, rose 40% while its net interest margin increased 48 basis points to 2.11%, with its fourth-quarter net interest margin significantly higher at 2.61%. In addition, net interest income and net interest margin did not benefit yet from the repricing of SGD 180 billion of fixed-rate assets, which will take place in the coming years.

Loans grew 4% in constant-currency terms during the year to SGD 415 billion. Growth in the first nine months was moderated by a slight decline in the fourth quarter. While underlying demand continued to be healthy in the last three months, some corporates shifted their borrowing to cheaper financing options or repaid opportunistic borrowing, and wealth management customers reduced margin loans.

Non-trade corporate loans rose 5% or SGD 13 billion to SGD 248 billion. Like the previous year, the growth was diversified across countries and sectors. By region, Singapore and Hong Kong accounted for half the growth, with the rest from elsewhere in the region and from our international centres. By industry, the growth was led by real estate, energy, and technology, media and telecoms. We carried out 156 sustainable loan transactions with a disbursement amount of SGD 20 billion, comparable to the previous year.

Trade loans rose 4% or SGD 2 billion to SGD 44 billion, with an increase in the first half partially offset by a decline in the second half due to unattractive pricing.

Housing loans rose 4% or SGD 3 billion to SGD 81 billion. While bookings were below the previous year’s record in line with the lower number of market transactions, they were still healthy for new launches, resale activity and refinancing.

Other consumer loans fell 7% or SGD 3 billion to SGD 43 billion as wealth management loans declined with lower risk appetite amidst volatile financial markets.

Deposits grew 7% or SGD 33 billion in constant-currency terms to SGD 527 billion. In contrast to the previous two years, all of the growth was in fixed deposits, mostly in foreign currencies. These deposits were used to fund foreign-currency loan growth, replace more expensive commercial paper, and replace Casa outflows. Growing foreign-currency fixed deposits enabled us to maintain our surplus Singapore Casa deposits, whose returns progressively rose with interest rates. The ample liquidity resulted in a liquidity coverage ratio of 140% and net stable funding ratio of 117%, well above regulatory requirements.

Net fee income declined 12% to SGD 3.09 billion. Wealth management fees fell 26% to SGD 1.33 billion as market volatility resulted in lower investment product sales. Bancassurance sales were moderately lower. The weaker market conditions also affected investment banking fees, which fell 44% to SGD 121 million.

Other fee activities continued to grow. Card fees rose 20% to SGD 858 million. The increase picked up as the year progressed and card fees surpassed pre-pandemic levels in the second half. Overall annual card spending rose to a second consecutive record with travel spending continuing to recover towards pre-pandemic levels. Transaction service fees were stable at SGD 929 million as growth led by cash management was moderated by lower brokerage commissions from institutions. Loan-related fees rose 11% to SGD 459 million.

Other non-interest income grew 11% to SGD 2.47 billion. Increases in Treasury Markets non-interest income as well as treasury customer sales to both corporate and wealth management customers were moderated by lower investment gains.

By business unit, Consumer Banking/ Wealth Management income rose 25% to SGD 6.65 billion as higher interest rates more than offset the impact of lower wealth management investment product sales. Wealth Management customer segment income increased 20% as higher interest rates more than offset lower fee income from investment sales. Assets under management grew 3% in constant-currency terms to a new high of SGD 297 billion, underpinned by record net new money inflows of SGD 24 billion. Institutional Banking income rose 28% to SGD 7.69 billion. The growth was led by a more than doubling of cash management income as a result of higher interest rates. Income from treasury customer sales was also higher. These gains were moderated by weaker capital markets activity. Treasury Markets income declined 22% from the previous year’s exceptional levels to a more normalised SGD 1.17 billion.

By region, Singapore income rose 20% to SGD 10.6 billion from higher interest rates and loan growth. Net interest margin increased as loans repriced in line with higher interest rates. Partially offsetting the higher net interest income was lower fee income from wealth management and investment banking fees. Hong Kong income rose 16% in constant-currency terms to SGD 2.92 billion from higher interest rates and higher trading gains, which were partially offset by lower fee income. Rest of Greater China income was stable at SGD 1.16 billion as higher net interest income and trading income were offset by lower fee income. South and Southeast Asia income rose 5% to SGD 1.18 billion from higher net interest income.

Expenses rose 10% to SGD 7.09 billion, led by higher staff costs. The positive jaw of six percentage points resulted in a three percentage-point improvement in the cost-income ratio to 43%. Profit before allowances rose to a new high of SGD 9.41 billion.

Balance sheet remains strong

Asset quality was resilient throughout the year. Non-performing assets fell 12% to SGD 5.13 billion while the NPL ratio improved from 1.3% to 1.1%. New non-performing asset formation remained low and was offset by repayments and write-offs. Specific allowances amounted to eight basis points of loans or SGD 335 million, moderately below the 12 basis points a year ago.

General allowances of SGD 98 million were written back during the year due to transfers to NPA, upgrades and repayments. Total allowance reserves amounted to SGD 6.24 billion, comprising general allowance reserves of SGD 3.74 billion and specific allowance reserves of SGD 2.51 billion. Allowance coverage was at 122% and at 215% when collateral was considered.

Our Common Equity Tier 1 ratio rose to 14.6%. The leverage ratio of 6.4% was more than twice the regulatory requirement of 3%.

Total shareholder returns

We delivered total shareholder returns of 8%, comprising share price gains of 4% and the dividend paid out during the calendar year of SGD 1.44 per share (comprising the final 2021 dividend and the dividends for the first three quarters of 2022, each of which was 36 cents per share).

Increase in quarterly dividend and a special dividend

The Board proposed a final dividend of 42 cents per share, an increase of six cents from the previous payout, and a special dividend of 50 cents per share. The combined payout of 92 cents per share reflects our robust earnings profile and strong capital position. Together with the ordinary dividends of 36 cents per share for each of the first three quarters, the total dividend payout for the financial year rose to SGD 2.00 per share, a 67% increase from the SGD 1.20 per share for financial year 2021.

Barring unforeseen circumstances, the annualised dividend will rise to SGD 1.68 per share.

Outlook

At time of writing, macroeconomic conditions are improving. Inflation, while still high, is moderating. China’s reopening will boost confidence and economic activity in the region. The IMF recently upgraded its global growth forecast for 2023 from 2.7% to 2.9%, although it would still be below the 3.4% in 2022.

The better environment will support business momentum in the coming year. We expect loans to grow by mid-single-digit percentage terms. Fee income should grow by double digits as the return of animal spirits to financial markets enables wealth management to recover from the declines in 2022, and as travel resumption boosts card spending further.

Our full-year net interest margin will be significantly higher due to base effects as well as net benefits from further interest rate increases at least in the first few months of the year.

Our current stress tests indicate that asset quality will remain benign, with specific allowance charges likely to be below our through-the-cycle average of around 20 basis points.

If these forecasts hold for the year, we expect to deliver another record performance in 2023.

(A) Digitalisation
We continued to make significant progress in our digital transformation for the Consumer and SME businesses in Singapore and Hong Kong. Our drive for deeper digital engagement resulted in the number of digital customers more than doubling from 1.9 million in 2015, when we first tracked customers’ digital adoption, to 4.1 million in 2022. The proportion of digital customers rose by 27 percentage points over the seven years to 60%, delivering on our targets.

The share of income from digital customers rose 33 percentage points over the seven years to 82% in 2022. The digital segment continued to be more valuable due to stickier, deeper and broader customer relationships. With more diverse product holdings and number of transactions, digital customers consistently generated more than twice the income on average than traditional ones.

The reported cost-income ratio of the overall business improved by 11 percentage points from the previous year to 40% on the back of higher rates and volumes. On an underlying basis, which normalises for changes in net interest margin, the cost-income ratio was 44%, an improvement of one percentage point from the previous year. The underlying cost-income ratio improved five percentage points since 2015 even as we continued to invest to sustain our advantage over peers.

The ROE for the overall business in 2022 was 37%, with the digital segment at 39% compared to 24% for the traditional segment.

 

 

(B) Business unit performance
Consumer Banking/ Wealth Management total income grew 25% to SGD 6.65 billion. Net interest income rose 68% to SGD 4.27 billion from a higher net interest margin and growth in loan and deposit volumes. Non-interest income fell 14% to SGD 2.38 billion on lower fee income from investment product sales and bancassurance. Expenses increased 13% to SGD 3.80 billion. Total allowances increased by SGD 112 million to SGD 158 million due mainly to higher general allowances. Profit before tax increased by 40% to SGD 2.69 billion.

Institutional Banking total income rose 28% to SGD 7.69 billion from higher net interest income, increased loan-related activities and stronger treasury customer flows, offset by lower capital market activities. Expenses increased 8% to SGD 2.25 billion. Total allowances declined by SGD 345 million to a write-back of SGD 204 million. Profit before tax rose 50% to SGD 5.64 billion.

Treasury Markets total income normalised to SGD 1.17 billion mainly due to lower contributions from equity derivatives and interest rate activities, partially offset by foreign exchange and credit activities. Expenses fell 4% to SGD 619 million from lower operating costs partially offset by higher staff costs. Profit before tax fell 34% to SGD 569 million.

The Others segment encompasses the results of corporate decisions that are not attributed to business segments. It includes earnings on capital deployed into high quality assets, earnings from non-core asset sales and certain other head office items such as centrally raised allowances. DBS Vickers is also included in this segment.

(C) Net interest income
Commercial book net interest income, which excludes Treasury Markets, rose 40% to SGD 10.7 billion. Its full-year NIM rose 48 basis points to 2.11% from higher interest rates. The fourth-quarter NIM was significantly higher at 2.61%, having risen 100 basis points from fourth-quarter 2021.

The increase in Commercial book net interest income was offset by a 72% decline in Treasury Markets net interest income to SGD 222 million due to higher funding costs for its operations. The drag in its net interest income is generally offset by gains in the non-interest income line.

As a result, overall net interest income grew 30% to SGD 10.9 billion.

Gross loans grew 4% or SGD 14 billion in constant-currency terms to SGD 420 billion. Non-trade corporate loans increased 5% or SGD 13 billion from broad-based growth across countries and sectors. Trade loans rose 4% or SGD 2 billion, with an increase in the first half partially offset by a decline in the second half due to unattractive pricing. Housing loans grew 4% or SGD 3 billion, with the majority of the growth occurring in the second half. Other consumer loans fell 7% or SGD 3 billion as wealth management loans declined.

Deposits rose 7% or SGD 33 billion in constant-currency terms to SGD 527 billion as fixed deposit growth more than offset current and savings account outflows. Our market share of Singapore savings deposits rose 0.7 percentage points during the year to slightly more than 53%.

(D) Non-interest income
Net fee income fell 12% to SGD 3.09 billion. Wealth management fees declined 26% to SGD 1.33 billion as weaker market conditions led to lower investment product sales. Investment banking fees were also lower, by 44% to SGD 121 million, as capital market activities slowed.

Other fee activities continued to grow. Card fees rose 20% to a new high of SGD 858 million as overall card spending reached a record and travel spending progressively recovered. Loan-related fees increased 11% to SGD 459 million. Transaction service fees were stable at SGD 929 million as higher cash management and trade fees were offset by lower brokerage commissions from institutional clients.

Other non-interest income rose 11% to SGD 2.47 billion, which was due mainly to Treasury Markets activities.

 

(E) Expenses
Expenses rose 10% to SGD 7.09 billion. The increase was led by a 13% increase in staff costs. Other costs also increased due to higher computerisation expenses.

(F) Asset quality and allowances
Non-performing assets fell 12% to SGD 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 1.3% to 1.1%.

Specific allowances fell 33% to SGD 335 million or eight basis points of loans. There was a general write-back of SGD 98 million from transfers to NPA, upgrades and repayments.

Allowance reserves continued to be high. General allowance reserves amounted to SGD 3.74 billion, which included SGD 2.05 billion of general allowance overlays. Together with specific allowance reserves of SGD 2.51 billion, total allowance reserves amounted to SGD 6.24 billion. Allowance coverage of non-performing assets was at 122% and at 215% when collateral was considered.