DBS Group Holdings Ltd
SGX:D05
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DBS Group Holdings Ltd
Earnings Call Analysis
Q3-2024 Analysis
DBS Group Holdings Ltd
In the recent earnings call, the management outlined the bank's performance and future strategies. While they acknowledged current revenue pressures, they remain optimistic about resuming growth in the upcoming quarters. The central theme was maintaining cost control while navigating the fluctuating interest rate environment, with targeted loan growth between 3% to 5% for the upcoming year.
A significant concern highlighted was the projected loss of interest income, estimated to be between $500 million to $600 million due to a noted decline in net interest margin (NIM). The management projects NIM sensitivity to increase from 4 million basis points currently to approximately 6 million by the end of next year, as they replace fixed-rate assets maturing at lower yields with new assets at higher rates.
Revenue growth is anticipated to be modest, with guidance indicating only a couple of percentage points increase in overall income. This lackluster growth correlates with tightening in the card portfolio due to increased delinquencies. Consequently, operating expenses are expected to rise by around 5% in the upcoming year, resulting in a higher cost/income ratio.
The wealth management segment remains a focal point for growth, boasting a current AUM investment ratio of 56%. Management aims to enhance this engagement further through a more aggressive onboarding of new Relationship Managers (RMs), projecting that productivity from recent hires will begin contributing significantly to profitability over the next few years.
As part of its growth strategy, management is exploring potential M&A opportunities, specifically in Malaysia. However, they emphasized the need for favorable regulations and the proper strategic fit before moving forward. The management's perspective reflects a cautious but optimistic approach towards expansion.
Management has identified several sectors with robust pipelines, including infrastructure related to renewables, data centers, and healthcare. They noted a recovery in the REIT market will serve as further growth potential. A focus on cross-border payments and high ROE opportunities remains critical as the bank aims to establish a competitive edge in evolving markets.
In summary, while current forecasts indicate a challenging revenue environment due to macroeconomic factors, the bank remains committed to efficiency and strategic growth initiatives. Plans for capital returns through share buybacks remain on the table, with management signaling a capacity for an additional $3 billion to $5 billion in buybacks depending on market conditions. Overall, the bank reinforces a resilient yet flexible approach to navigating the future market landscape.
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So welcome, everyone. I think you would have heard the media briefings, so we can, as usual, go straight to Q&A. It's a hybrid session this time. So there are some people in the room. [Operator Instructions] But why don't we start with some questions in the room first. Harsh?
Congratulations. Thanks for doing it in person and great results. Two questions. First on buyback, second on ALM. The point you made, Piyush, on comparing to JPM and Apple was very interesting because these guys over the last decade have canceled about 30-odd percent of shares. So the question is to you and Su Shan is, is this more one-off because you guys had this big capital release and maybe another $3 billion, $5 billion we had done? Or is it beginning of that a decade-long journey where you cancel out a big chunk of shares?
And then the related question to that is, does the Temasek shareholding at some point in time become an issue? So how do we dimension that? And also, how do you do this share buyback? Is it a more on weakness? Or is it you buy every day kind of thing? So some of those details on buybacks. Second one on ALM, I'll go after that.
So on buyback, JP announces about 5% of the market cap as buyback as a program, and they take the program over 2, 3 years, right? So they've done cumulatively over time, and they continue to buy back as price to book goes up. But they're quite sensible. You can see the buyback, they buy back more when there's an opportunity as opposed to -- for the time being, that's what we're going to do. Whether and for the time being also, our total buyback capacity, we can do this, we can do another tranche of another couple of billion dollars before we run into the Temasek challenge. So we have that much cushion. And that's what we've projected for now.
If you look at the total capital that we need to still return, there's another $3 billion to $5 billion based on final. And if we -- of our transition capital, which we have a lot, we'll use some of it to not repay -- or to repay AT1s and AT2. So we have about $6-odd billion in transition capital. We'll use about $3 billion to repay the AT1, AT2. So we still have another $3 billion. That we haven't formed a view whether to return it because then you'll need it again. So we might be think about that differently.
We could return some because we'll accrete profit also along the way. But the balance between this buyback, we have the reserve of another buyback, doing specials and continue to step up our dividend. We think we can return a chunk of the capital that way. That's the way to think about it.
And I'll just add that we would -- obviously, we pay as we earn and we have enough buffer. We will continue on this path of returning back capital to shareholders when I take over. And this just increases our toolkit, as I said. So the 3 different prongs approach we will continue.
And the Temasek challenge is that what shareholding level, is it? 33%, 35%, 40%.
The problem is only, no the some. The challenge is only that at 30%, technically, they need to make a general offer. So unless they get a white wash, and I think everybody is reluctant to try and go for a white wash or this thing. So that's the big thing. Do you want to get to a stage where they have to do a general offer to mop up all the shares or not? And ex that, there is no challenge. and they'd be happy to do anything. So it's not an insurmountable challenge, but it's something we've always kept in mind, right? We don't want to get to that situation.
There's also an underlying policy of how much do you want to be owned by the sovereign and the state, right? Where does it start? So there's an underlying issue around that as well. So we're a little thoughtful about that. And again, we say how will we do it? We'll do it on weakness by much. we're giving ourselves enough cushion to do it on weakness.
Then the second one on ALM. That was one of the main discussions last quarter that we are planning the duration, managing so that you can keep delevering. And you kind of said that 2025 pretax is almost similar, potentially even net profit as well with the rate environment. But if we think about, let's say, '26, '27, because these are very elevated earnings capacity, how are you thinking about now doing ALM, what kind of duration extension?
We're actually so far doing the same. So this year, we had about 45 billion of fixed assets that came up for renewal. We replaced them with about 60 billion. So we actually added another $15 billion of it by end of the year, about $15 billion, $16 billion of incremental. And if you look at the delta, our assets which are coming off are roughly at about 2.2% yield, and we've been adding them at about 3.8% to 4%.
So we're getting about 170, 180 points pickup on the maturing and the new that we are adding on. If you look at next year, our maturing assets are about $55 billion in this thing. And prior to yesterday with our rate cut assumption and so on, we were still getting a yield pickup in the first half of the year because it's still low-priced assets coming off, but we were not getting a yield pickup in the second half of the year because there will be the 3-year old assets and so on.
But net-net, you are still getting a pickup next year on this thing, but nowhere near like this year. The main thing though is if you look at going forward, you will not continue to get pickup in assets. But if we assume that the neutral rate wind up at 3-odd percent, you will not go back to the 0%, 1%, 2% levels either. So you will continue to get income trip. This will not be a source of more of this thing, but then the function is really what's the outlook on rates beyond that. anybody's guess, the rates are going up, coming down, whatever.
Sorry, the last one is on how much of NIM are you willing to give today to lock in, let's say, 2 years out? For example, to mortgage point, like if you do a SORA plus spread on a 3.5%, 4%, market rate is 2.5%. So you're giving up a lot in a bid to take, let's say, 3 years. So yes, mortgage, as you said, you would not need it. But the other pockets of assets where in a bid to lengthen duration, you have to give up a lot? And how does that change with much higher rates and extra...
It depends on the outlook on rates, right? So if your overall outlook is a declining interest rate environment, then you will make the trade-off and lock in rates because you think you're going to give up more on a floating rate. If your outlook is a steady rate environment or a rising interest rate environment, then you won't do it. So we take that view every month. We said, I take an interest rate view and then decide whether it's sensible to add duration at these levels or not, it's not a policy. It's based on our view on where the rate curve might go.
And you see that we have been quite sensible. On the way up, we were 18 million to 20 million basis points of net interest rate sensitivity. And then on the way sort of down, we told you about 4 million. So this monthly process at [indiscernible] is very helpful to align everybody on how we want to take interest rate risk and what do we give up in the short term versus what we are able to extend longer term. But it's a dynamic read at every out.
[indiscernible] Duration, we don't go that long. Average duration is about 3 years max. So we just operate in the value of the curve. We don't commit to it.
Which is why for the fixed rate repricing portfolio that Piyush talked about, the $55 billion that's coming out in 2025, based on our model and versus yesterday, I think there's potential room for rates to go up, and therefore, we'll get another lift right. And so not everything has been baked into the forecast that we sort of try and guide the market.
Yes, a couple of questions. First is just you've mentioned about thinking about loan growth of 3% to 5%, about 5% next year. So I'm just wondering where you think that might come from because that seems like quite a big recovery given where we have been this year. And then secondly, a bit more of a technical question for [indiscernible] you spoke about the tax. Could you just explain to us what is the dynamic about 15% that actually need your tax rate to go because you're already...
[indiscernible] loan growth, it's not a dramatic recovery, right? We are up 2% for the year this year. And if you get some loan growth in the third quarter, it could be -- wind up at about 3%. So if you go from 3% to 4%, it's not huge. And our general view is that if rates come off, even if the Fed slows down and you still have 1.5% and you don't have 2%, you have only 1.5%, a declining interest rate environment, you'll see some pickup in demand.
And Su Shan can comment on the areas and sectors you're seeing it. But we are seeing reasonably healthy pipelines across both geographies and sectors. Su Shan, do you want to?
So actually, we had quite a lot of new loan growth this year. It's just that the repayments came in quite strong in the second and third quarter. It seems to be petering out right now. Our pipeline is strong. There's a return of leverage buyouts. There's a return in this real organic growth in Asia and the needs for data centers, semiconductor supply chains, food and agri, healthcare, et cetera.
So we are seeing real structural need for growth, and that's in our pipelines. We've built some in-depth expertise in industries like renewables, infrastructure around renewables and TMT and data centers, et cetera, as I said. So -- and the China...
And property continues to be an area of growth. We're seeing -- a lot of it is deal specific, but there's consolidation, et cetera, but that continues to be...
The recovery in the REIT market will be helpful for. The REITs needed to do stuff. They haven't been able to do anything for a while, and now that will probably come back as well. So the structural pipeline is actually good. It's just that this year was difficult. There were a lot of repayments. And I'm constructive for next year's outlook.
So on the tax question, if you look at our disclosure under the Singapore segment performance, you'll see that our tax rate in Singapore today, because it's jurisdictional, is actually below 15%. And across all the other markets, Singapore will be sort of the country where we'll be facing this minimum tax rate issue. All our other locations, by and large, they are above the 15% tax regime.
So come next year, IRS has already announced that tax rates will move to a minimum of 15%. That's in line with global. And because today, we are paying less than 15%, and there are sort of dispensations for example, on derivatives trading on some of the bond trading activities, but actually today, they are taxed at lower rates. So next year is going to be an accounting view, right? It's going to be whatever you're reporting in the Singapore market, so you look at DBS because in Singapore and other large ones in the bank. And on that basis, you just have to pay 15% tax on that number. And therefore, that actually increases the tax that we'll be paying next year by about $400 million.
I just have one more. Just in terms of oil and gas recoveries, is there a lot more of that still to come through...
We recovered about $130 million so far in NPL this quarter, the SP reversal $80-odd million. And we could have maybe potentially add much more. We've been able to sell stuff. So some of the payments, but we've been able to sell a lot of the vessels and things. And yes, we have some other things in the pipeline.
Aakash?
Congratulations, Su Shan, on news. The first question is just around the buybacks, Piyush. I think in your comments, I think you mentioned that other companies do it in 2, 3 years' time frame. Is that sort of the time frame that you're also setting for yourself?
Because back to, we want to do it on weakness. So it depends on how [indiscernible] tomorrow comes in and says there is massive tariff across the Asia, I can tell you we'll have a buying opportunity.
And the $0.24 core step-up that you have announced in the past, how long is that for?
We said in the past that medium term, and we said medium term could be 3 to 5 years. So that was about 12, 18 months about. So next couple of years, we're [indiscernible] ...
And then I think in terms of the NIM sensitivity, which is obviously lower at the moment because of the fixed rate hedges that you have?
That is for two reasons. I like to see. So if you take the fixed rate hedges only account for 1/3 of the drop in. The bigger reason is the switch from CASA to fixed deposits. So $140 billion has gone from CASA to fixed deposits. So when you're in fixed deposit, you lock in the rates and reduces the interest rate sensitivity. So it's a function of both things.
And both of these things, I mean, I think as you were saying CASA is starting to act, so that will reverse, [indiscernible].
So our current projection is that the NIM sensitivity end of next year, assuming before it [indiscernible], right, will move from 4 million to close to 6 million because the asset repricing will be a little bit of a headwind and some CASA will start coming back. So it's not one way. It will move to about that by the end of next year.
So right now, it's 2 million by mid of next year...
No. Right now, it's 4 million. And by end of next year, it will probably move up by another couple.
4 million basis points. And then I have a couple of strategy questions, just high level. So you focused a lot on continuity last time when the transition happened. And I think a lot of investors are wondering if Mr. Peter [indiscernible] contract is also part of the continuity because...
We don't. There's no contract either for him or for me. So when you look at this thing, we decided to plan transition to make sure that we won't both walk away at the same time, right?
But about one year later? So I think...
No. He is going to be around for some time.
And I think, Su Shan, yourself, I think you're inheriting this bank and its peak profitability. Even if you assume rate cuts, like 10 rate cuts, you get a 16%, 17% ROE. It's a very, very profitable bank, right? And I think this is bound to get a lot of -- see a lot of competition as well, either from existing players or from new players coming to this market. How would you think about that?
I still see growth opportunities. I think the key message is continue to grow, continue to deliver, continue to execute, continue to perform. We've built a great base. We're not going to change costs suddenly just because I'm the new CEO. It's worked for us to be very focused and focus on delivering. So we will continue to grow the two big core markets of Singapore and Hong Kong as our core connectivity markets. You've got wealth management growing here. You've got trade growing. These are the two big hubs.
The growth markets that we have, right, around India, Indonesia, China, there will be years where one does better than the other. There'll be years where one slows down, one picks up. And we're well positioned to toggle the growth between these three growth markets. And then Taiwan, obviously, with the Citi acquisition as well is highly earnings accretive, and we're still seeing more upside there.
And then the connectivity growth story is that we're seeing now a lot more sort of inbound traffic, whether it's intra-regional, China coming to ASEAN. That trade growth is up 30-odd percent, right? So we're seeing that as a big growth opportunity. We'll continue to double down on that.
Wealth management is another growth opportunity, high ROE business, and there's still more to be done, new customers we onboarded, new to bank, new to product, new deepening, et cetera. We've hired a lot of new RMs and they're settling in. The productivity is kicking in. So still good growth opportunities around wealth, which is a big ROE growth driver, growth opportunities around FICC. When we started the FICC business, we were like $500 million, then $800 million, then $1 billion, then $1.3 billion, $1.4 billion.
There's pathways to go to $2 billion. So we're seeing these good growth opportunities, high ROE payments as well, another one, big cross-border, low-value payments is also another good sort of growth, high ROE business. So we're going to focus on delivering some of these high ROE businesses as well, right?
And then the commitment to continue to use what we built around technology transformation, digital adoption, AI models, now generative AI, you can have productivity rises, you save money. You become more contextual, your models work better if you continue to work at it. We've created a data mode, I think, to keep us ahead. We'll continue to stay ahead with that. So I think the underbelly of strong growth and productivity, discipline on costs, focusing on where growth is, being able to toggle between markets as some higher growth than others and focusing on high ROE delivery.
How keen are you on exploring new markets like Malaysia or Indonesia, where I think DBS is [indiscernible].
So if you're asking me about sort of M&A, I think the message we've always said has been very consistent. if it's in our markets, number one, is the price right? Number two, is it a business we know how to integrate and operate. And number three, are there synergies? Is it part of our strategy? And if we tick all 3 boxes, of course, we'll look at it, right?
So you asked me specifically around Indonesia or Malaysia. Indonesia, as I said, if it ticks all 3 boxes, we'll look at it. Malaysia, really, of course, it's interesting. It's close to our Singapore hub, but that depends on a lot of things like government views, et cetera, regulatory issues.
I just have two follow-up questions. First, in terms of you mentioned the NIM sensitivity, right, that moving from 4% to 5% to 6%. Does that account for also the roll-off of the hedges that you have? That's why it goes from 4% to 6%? Or what if, let's say, the full roll-off of the hedge, what does it actually move to in terms of this NIM sensitive?
In our modeling, we do assume that the fixed rate portfolio that's rolling off will be replaced by fixed rate. So that's one assumption. Like I said, if we have more CASA flowing in, which Piyush mentioned, that will bring us also to a higher number. And we choose not to do some of the fixed rate and cut down on the roll-off, it also changes the number.
So [indiscernible] if we have a view that rates are going to rise, there won't be a NIM sensitivity. I won't put on hedges and I'll wait because that's what gives us the thing. If the rates are going to come down, then I put on the hedges there.
So there are some hedges there. So you just let them roll off.
It depends on our view on rates, right? So if you look at our total $190 billion of fixed rate is what we have, 36% of our commercial book that comprises 3 different things. It comprises the fixed rate assets we have in the rail business, fixed rate mortgages, fixed rate loans, et cetera. It comprises the duration overlay portfolio. We go and buy some fixed rate bonds and so on. And it comprises the hedges we put on, on top of that. That total gives you 36%.
So all three are subject to a view on the markets. We figure that duration needs to be put on because in this environment means we need to lock in rates, then we roll over and do it. If we think that it's going the other way, and we would be better to let the balance sheet float, then we just let the hedges roll off and don't go and buy more.
Just coming on this CASA thing. So you said that CASA that we've seen CASA come back, right? But then the spread between CASA rates and FD rates are still quite decent. And in a high rate environment, that would remain as it is, right? So does that impact your NIM outlook or...
[indiscernible] Outlook. If you wind up getting a lot more CASA back, our interest income will be much higher.
Do you think it will come back because the spread is still going to be quite [indiscernible]...
Your guess is as good as mine, right? So we lost $140 billion moved out, right? If you look at historic this thing, about 3% is a good tipping point. When rates start coming below 3%, people are less sensitive to the difference, and so we expect a lot more to come back from fixed deposits to CASA. As consumer behavior changed, and so today, do people think about it differently, maybe. I think it's instructive though that even if you look at the Singapore rates, right, as the T-bill rates have been coming down to the headline rate of around 3%, our outflow to T-bills has come down by half and the inflow is coming in at 8%, 10% higher than what went out, right?
So I think the general thing that consumer psychology is such that at some tipping point, people stop bothering to go and look for yield. I think it still plays. Whether it changes the margin, it could, which is why I can't project how much CASA will come back. But as a general rule, I think CASA and that's helpful for us, obviously. It technically changes the sensitivity, but it improves our interest income massively.
And then just on clarity on the '24 step-up, right? You said it's going to go up, right? In terms of payout ratios, is there a point where you said, okay, it's capital flat, not generated anymore in terms of the payout? Is it 70%, that kind of thought that 70% would be capital flat?
We've never actually guided to a payout ratio for that reason. We said we'll sort of do it on a [indiscernible] basis. But yes, the Aussie banks go up even higher. Some of the Canadians sometimes go higher, but defense, they've got some tax reasons for going up higher. But yes, given our overall outlook, it's not a bad assumption that it will probably get up to that level.
If I just squeeze one last question for Su Shan. You talked a lot about where you wanted to go, right? But maybe is there one area you think that needs a little bit of a stronger look at for the bank as you said in next year, is there one division or one segment that you want to [indiscernible]...
So interestingly enough, India, the Corporate Bank has been our best-performing market. It's been fantastic. And that's due to our early investments and both in technology and also obviously, in the purchase and also growing our network, but also deepening some of the big relationships. So that's been great. The consumer bank that still needs some look, some relook, and we will do that. We will do that [indiscernible] the India has been a great growth market. We are very committed. We'll continue to grow that.
I think maybe I don't think relook means that we will rethink our strategy. It just means that it's still not performing to where we need it to perform. So...
Need to work harder and find more.
Do you think it's working harder? Or do you think you need to bolt on in India to make it more sizable?
If we could find the right thing, we would consider a bolt-on. But it's not straightforward finding the right deal. And we look at all of the big deals in the market, they're too big and too thorny. And so even doing the LVB deal is not easy, 500 branches across distinct culture. So we are reluctant to do a really large-sized deal like IDBI Bank or Yes Bank.
Those are really big ticket sizes and might not suit us. We have to find something. So right now, we're just trying to make sure that we sweat what we bought. Even the LVB, the 500 branches, we now only about 300 of them are profitable. 100 will never be profitable because of the semi-rural branches. The idea is just to get to be in, but we still need to drive and make another 80, 100 branches drive them to profitability [indiscernible].
Andrea from CGS.
Two questions from me. Firstly, how do we look at the GP write-backs that you announced? Will this depend on model improvements, whether it's from the MEV perspective or from your own portfolio in terms of PB LGD? Or will this be a more deliberate means like we're looking at a targeted number, for example, how do we look at this and perhaps, how large this could potentially be?
Then the GP, by and large, the model, whatever the model throw, we let it flow through. So the models give us an improve, we let it flow through. And so even in the last couple of quarters, when you see it moves up and down, what was the -- and the model function of 2, 3 things, right? One is the underlying portfolio. So sometimes there is a repayment. If a weaker credit repays, then obviously, that has an impact on what the model throws up and vice versa. So we don't tap up with that. So our main thing that -- and obviously, sometimes the model improvements and -- but those are episodic and they're not huge. So the main question is the overlays.
So we've got $2.3 billion of overlays. And those overlays are sort of judgmental. We link them to macroeconomic variables and our assessment of downside scenarios and the probability of downside scenarios. And based on that, we come up with this thing that is prudent to keep. And so if your assessment of the economic conditions changes or assessment of the probability attached to those condition changes, then you could wind up releasing GP.
Most of the big banks who kept or built up GP in the COVID period, by and large, released a lot of it, including this year. We are a little bit unusual because we haven't released anything. We just hung on to that $2.3 billion all the way through. Frankly, we're coming under some scrutiny from our auditors who are saying, you've got too much GP. So we'll see with Trump and the uncertainty after Trump, it might still be sensible to keep some money in the [indiscernible].
Range of how much per se that you're looking to keep in the short term, medium term, not in that way?
Next question is on your -- the other thing I'll point out is whenever we have NPLs because we identified a lot of our watch list cases very early, would have put substantial GP against it. GP is also released when we move into NPL. So there's some offset between the SP and GP lines.
And there's been a strong recovery in the oil and gas sector. Is the bank a bit more positive on perhaps giving up more lines or more loans to the sector? Or has your stance not changed?
Actually, our main difference if you look at the big write-offs we took in the oil and gas sector, they were in the mid-cap space in Singapore. So all of the big offshore services games and names. we revised our target bucket and our risk criteria for that. I don't think we're going to change that. We were just overexposed into that category of mid-cap.
Outside of that, our stance on oil and gas has not been an issue and the large players in this thing, we still look at them. It's just not a big industry for us because there's not a big oil and gas other than trading. I mean, trading is the trader, the people are buying. It's not a big sector.
And a lot of them have now pivoted to doing the offshore wind and offshore renewables.
Jayden from Macquarie.
Just a couple of follow-up questions. There's been some great questions already. But just on the wealth side, the performance was excellent, even if you strip out the Taiwan inclusion. I think you mentioned during the media briefing that the proportion of investment AUM to total is now in the high 50s. How high do you think it could get? Is there sort of a previous yardstick you had? Or is there any peers that you're looking at as a potential opportunity? And then do you sort of push each of the RMs to have a certain ratio? Or do you look at it collectively?
So 56% is already a record for us, 56%. But you got to understand that as you know, we've got three underlying segments, right? The pure private bank, the private bank business and then the affluent premium business. The investment ratio in the premium business is in the 30s and the investment ratio in the private bank business is closer to 70%. So it's a range that gives you an average of 56%. In the premium business, you will see some pickup, but I don't see a lot more.
People like to invest with some. We are seeing some as our digital tools are falling into place, right? So financial planning, digital portfolio, et cetera. It's moving up, but I don't see that getting up to 50%, 60%. I think it will probably stay in the high 30s. Whereas in the other two segments, if you look at some of the pure blueblood investment banks, they get up to 75%, 80% investment ratios. So I think there is a lot more headroom in those items.
So is it fair to say then that because most of the growth in the fee seems to be that switch, right? The AUM has gone up a bit, but a lot of it has been the higher switch. Is it fair to say that that's largely done?
No, no. Net new money is the other growth. We're growing $6 billion a quarter. So we've put on -- last 2 years, we're growing $6 billion a quarter. We're growing $6 billion a quarter right now. We added 120 RMs of bankers in the last year, right, across 130 in the last 18 months. And many of the bankers haven't even started hitting the productivity levels.
Our general rule is first year, a banker gets to $500, $600 of $1,000 of income. But by year 3, they start creating $4 billion of income. So the productivity from the new RMs you added on has not even kicked in. So we see a lot of growth from the expansion in the base from the net new money growth on top of obviously continued move in the investment. And I said that we said that, I mean, we are in the high 60s in the other 2 segments. If we can drive that to 75%, 80%, there is still a lot more.
Okay. That's great to hear. And then maybe another question on the M&A front again. This is the first time I think you've openly discussed Malaysia, if I hear correctly. And that would be different for you because it wouldn't be bolt-on, that would be like integration of a new business. How much appetite is there to do something like that versus, say, a bolt-on? And then what would be the sort of preconditions you'd want to see before you moved into that market? Is it more on the political side? Or is it more just finding the right franchise?
I think, you want me go back to not in recent times, but some years back, I always talked about 3.5, 4 franchise. The half is always in Malaysia. The problem in Malaysia is not lack of interest, but lack of government to government or geopolitical. The issue has always been quite clear. The Malaysians have always said we've got two big Singapore banks over here. So why do we need a third Singapore bank.
And so we've actually had no headway from that dimension. With the new administration, we think there might be a little bit more flexibility in that. So that's the only reason why we are happy to talk about it again. If there's more flexibility, we look at it. But the underlying rules will still apply, and we'll have to find something that makes sense to us, suits us, et cetera...
Just 2 questions for me, one on the P&L and one on the strategy. Maybe just on the commercial noninterest income. Just wondering what are the drivers for this quarter? And how should we think about the commercial noninterest income from here? And second, maybe more on the strategy front. I think Su Shan earlier mentioned about connectivity and also the outbound Greater China business. So what is it? How can we quantify this in terms of P&L, loans growth, geographic exposure? And on the other hand, have you done any stress testing on the potential tariff on China? These are my 2 questions.
Maybe let me take your first question, commercial book noninterest income. So we created a view because people tend not to be able to differentiate that from the markets trading, where there's more volatility. The commercial book noninterest income tend to have a bit more stability and a large component of that is actually treasury customer sales income.
So under accounting, you can't put what you manufacture internally and put into fee income. But in nature, they are not different. It's just treasury markets creating those products as opposed to third-party providers for the sort of consumer banking side.
On the institutional banking side, all the flows go through T&M, and therefore, they are all captured there. So there's a lot of stickiness and that part actually has also risen nicely. We always show you a chart on the overall treasury and markets performance, and you see the CBG component, the IBG component of the sales income.
So just to communicate that you should be a lot more comfortable with the commercial book noninterest income. Within that noninterest income, sometimes there's some noise from hedging activity, mark-to-market activity, but those tend to be corporate treasury activities that may show up in that line, but they tend not to be large. They are tiny, they are a small fraction of the overall spec.
Yes. So on the connectivity bit, I think it's important to just step back to share that we've actually done a lot of work in creating industry expertise. in the corporate bank. So whether it's in renewables, project finance, syndicated loans, structuring, financial advice in TMT, in EV, nickel mining, et cetera. I think we've created a name for ourselves to be the go-to bank for such deals. So in doing so, we've set targets also for each industry to see what are your connectivity dollars and is it growing? I've always given the targets of you need to grow this.
So every country, every industry has set outbound, inbound targets. And where we've seen opportunities, we've seen opportunities in TMT. We've seen opportunities, obviously, in renewables. We've seen opportunities in China Plus One because Chinese supply chains have moved to ASEAN. And as long as we're embedded with the customer, we know their flows, we know their cash flow. We can help them to structure. We can help to advise. We get the structuring fee. We get the advisory fee.
And if it's, for example, in renewables, for example, we're actually end-to-end. We start from the project. We find the blended finance investors working with multi MTPs, working with blended finance guys. We get paid on the financial advice. We find the offtaker. And then when it matures, we asset recycle. So that keeps the recurring income pretty steady for every project, and then we can recycle and do something else.
It keeps the fee income. You noticed our loan fee income, although it was down on the quarter, it's actually up over 20% on the year. And that's, I think, also an ability for us to take market share and be top in the syndicated loan or in the project finance. So I see that continuing to grow because intra-regional trade continues to grow.
The connectivity is also outside in. So once we're within Asia is inside out, there's also outside in. So we're seeing also Western MSC want to come here. They want to go to India, for example, right? And they want to come to Singapore as well, set up a regional trading hub here and then go outwards, right? So our growth is also sort of linked to Singapore's own growth as a connectivity hub, and you can see that very closely correlated as well.
And the other interesting growth is also the pipeline between Asia and the Middle East. There's a lot of more trade flows. So we're seeing good LC growth there. Our clients going out there. We know these clients and if they want to do stuff there we can help.
And so have you done any stress testing in the event that decided to do any tariffs and whether the moving currency previously maybe some stress testing on what does it mean for these customers?
So if I could just add to that question, like these are big changes in macro and all of this. So given the shape of the portfolio, you're being super conservative, very limited credit growth, but what are the potential areas of risk that you're monitoring as you do your scenario analysis?
So the stress test that we've had, we've done everything, right, from oil prices to inflation to tariffs. And if I look at the Chinese companies that we bank so far, a lot of them have derisked from the U.S. They've had sort of the last 4, 5 years since the first Trump administration to really readjust their exports. So if anything, we're actually helping them to make that pivot, right? So I mean, whilst we stress tested, a lot of our existing positions are not quite geared towards that pipeline.
I think I said, the bigger annuity which is hard to stress test is the regulatory change. So they change the sanctions regime or they double down on technology or they create a complete bifurcation around use of take this thing, et cetera, et cetera. Semiconductors is the classic deal. It's not easy to stress test that. But the bigger macroeconomic variables, we stress tested everything quite okay.
Weldon from HSBC.
I have two questions. So on the noninterest income, I think your high single-digit growth. So I understand a lot of that is like transactional in your wealth business. So does that a lot of that resume like some market sentiment in the next year? And then is any part of that like trailer fees or like if the percentage of AUM investor stays high, do you still get that kind of growth even if there's no transaction. So that's the first question.
And then I also have a second question on a small clarification on the markets trading. So I think your 250, does that include the negative part of the NII? So if the negative [indiscernible] positive, then the noninterest income will come down, right, to normalize such that the total is 250...
On the first part, yes, and we've been changing the annuity component of the wealth fee consistently. And so the trailer fee, the discretionary portfolio fee, et cetera, is continuing to increase, but it's still only about 15-odd percent of the total. And so 80-odd percent of the income is transactional, and that is dependent on market sentiment. So if the markets completely collapse and there's risk off, then you'll see an impact on the wealth environment. That's correct. But like I said, our current assumptions are based on the forecast of this thing. The interest in North Asian markets has been kind of slow for the last couple of years.
It's really been predicated mostly on U.S. markets and all the other asset classes. If you get a very volatile environment, so you have risk off, but you do actually create a lot more opportunity in the underlying actually the old business.
It's a perennial kind of move. But at the end of the day, Asians like to trade, right? That's kind of the specialty of Asian high net worth clients. But we have been shifting to more annuity and more discretionary. And then this great wealth transfer of the first generation to the next. Now I think as family offices get set up, people become more familiar with diversification and risk volatility, et cetera, then there's a lot more discipline now in how customers manage their wealth.
They will have a strategic asset allocation bucket to funds and have that sort of steady returns. And then they might have a trading bucket that's more tactical for trading. So we're seeing that sophistication levels rise, and we're building the platform to meet this change in appetite.
Just one last question. Piyush, I think you talked about these 3 segments of wealth management, right? You gave us some information around the investment percentage. I'm just wondering if it's possible to start sharing like this information in a more structured manner. Like what is the revenue contribution from these segments and what's profitability what's the AUM?
I'm record, but I'm where you're doing that for competitive reasons.
The reason I'm asking is because I think because your wealth management is becoming such an important part of the business, investors might find it useful to kind of value it separately, right? They can do an SOT fee in which case it increases the value for the group overall. like they do it for some of the other big wealth management companies. And DBS, I think, is kind of getting there. So...
But we'll give it some thought. But I don't know any other private bank or wealth management that gives you that data. I looked for it myself.
But I think the thing is you have these 3 segments, whereas some of the private banks that investors value it this way, they have a much larger private banking portion.
No, they don't. You go and take a look. HSBC's declaration this time, you look at the number, they've added retail plus private bank, ultra plus asset management. But you look at what is in the retail and what is in the private bank, nobody knows where the cutoff is. Nobody knows which segment is what. So you go and look at UBS' disclosures. Nobody gives you what segments they run and where they cut off and what this thing. I've looked for the information quite actively. It's not there. So we've given some thought. We have the data. I'm just not intend to be the first to start disclosing that as nobody else in the world wants to disclose that.
So we started this journey in 2010.
What do you think will happen? How was it competitively will impacting you by disclosing that?
If I tell you. Then I'll have to kill you.
But the market looks at high net worth, which is normally like USD 1 million and above, right? And you can kind of look at it from. So it's like accredited investor versus non-accredited investor. But in 2010, when Piyush and I started, we created this wealth continuum precisely because DBS has a great franchise to bring new-to-bank customers in, right? And once you get in and you get to know the wealth life cycle, you start from consumer, you work up to treasuries, then you go to TPC and you go to PB. You have a whole life cycle, right?
And so as they grow, so it is really a continuum. And then as they get older, they might retire and say, no, you know what, I don't want to too much risk. I don't mind having FD and a few funds, then, okay, they might not want to stay in a sophisticated segment. So this continuum is precisely why we keep it so connected. It's where you get the most juice around upgrades and movements and keeping it.
I will give you some thought. I'll see if there's other people doing disclosure, there any benchmarks we can look at.
Does UBS do it at Switzerland? That's why I asked.
I don't think it [indiscernible].
I asked that you and on both in the last a year ago, and no does it. So maybe they don't have the information we do possible that [indiscernible] data not that clean.
I think in Switzerland for UBS, the retail bank is separate from the wealth management. So that kind of creates a distinction already, right? I think for you, it's kind of a little bit of a mixed up. So that's why I think it's difficult to value your private bank at the same multiple that UBS Swiss Private Bank will be valued at.
You look at this thing, right? All 3 segments of us all operate at a cost/income ratio of 48%, 49%, each one of them. So there is no efficiency difference across any of the segments in a cost-income ratio sense. And that's one of our big -- compared to all the other private banks who are all in the high 60s. We run a very efficient private banking.
Harsh has a follow-up?
Yes. More housekeeping questions on noninterest income and cost. With rates moving higher now, how do we think about the sustainability of some of the market income? And also you had some gains on the FOCI on CET1. What is the quantum which potentially can be reversed with higher mark-to-market as it higher yields leading to mark-to-market on FOCI?
But we saw that in the last year, right? I mean all of this, we still haven't clawed back all the FOCI we gave up in the last year or 2, right? So if you look at our total FOCI, we're still negative about $1 billion. At its peak, we've gone up to negative $3 billion, $4 billion. Now it's about negative $1 billion in our other comprehensive income statement. So we're just actually getting back a reversal of what we gave up in the interest rates in the last couple of years.
And most of the [indiscernible] is it fixed income or equity?
Mostly fixed income.
Income. So basically, now that rates have gapped especially long bond yields. But you're saying not in the -- you're in the belly of the curve, so not a lot. Second one on card seems to be now stabilizing around $300. Is that -- should we assume that the big delta in card, even transactions is kind of done with the rate and all the activity normalizing?
No. So I think you should assume that mid- to high single-digit growth in the 5% to 7%, 8% growth is reasonable, both on spend and on income. Actually, our net fee income might do double digits because of rewards management and so on, but the headline is around that. The issue is quite -- if you look at this quarter, it's slow, but that's deliberate. And that's because of the delinquencies, because the delinquencies are picking up around the region, which I indicated, we tightened up on the card portfolio. So that's a play of you want to take more risk in the cycle, you don't want to take risk in the cycle.
And the last one is on cost. The next year guidance, 40s cost-income ratio seems a bit higher than this year.
It has to be because income is not going to grow.
No. But overall guidance of flat kind of pretax. So I'm assuming is there -- as in cost growth, does it go?
No, it depends on, if you don't get the upside from yesterday's thing, our overall projection is a couple of percentage points of income growth. And it's a couple of percentage points because we're assuming $500 million, $600 million loss of interest income. So if you think about 200 basis points reduction, right, and at only 200 average. So you take an average on that, let's say, 150 basis points, 1% this year and 50 basis point average next year. So 150 basis points on our book, that's $500 million, $600 million of interest income loss, right?
So we've got to then cover up that interest income loss through loan volume and through everything else. So our overall income growth is a couple of percentage points. And expense growth, Su Shan is going to bring it down this year, it's about 7% after Citi Taiwan. If you shave it down and bring it down to 5-odd percent, you still have a higher cost/income ratio.
So it's more income rather than...
Income rather than cost.
I think there's no questions on the line and [indiscernible] questions. So I think we call it to a close.
All right. Thank you all.
Thank you.