Ladies and gentlemen, welcome to the Q&A Session for Third Quarter 2022 DBS Analyst Briefing. I will now hand the session to Michael to begin today's session. Michael, please begin.
Thanks, Diana. Thanks, everyone for dialing in and welcome to the session for the buy and sell side. You've heard the briefings from Piyush Gupta and Chng Sok Hui, so we can go straight to Q&A. Diana, could you please open the floor for questions?
We will now start the Q&A session. Audio participants with questions to pose, please press zero one on your telephone keypad, and you will be placed in the queue. To cancel the queue, please press zero two. Once again, zero one on your telephone keypad now. We have the first question from Prakash Sahoo, UBS. Please go ahead. Prakash Sahoo from UBS, please go ahead. Prakash, I believe that you might be on mute. We are not hearing you. Okay, while we wait for Prakash to get connected, I'll put through the next question from Nicholas Teh, Credit Suisse. Please go ahead, Nicholas.
Hi. Thanks for taking my questions. Just a few from me. Want to ask on the NIM, you talked about, you know, in your scenario that you could reach 2.25% in middle of 2023. Just want to understand, do you expect it then in the second half to start coming off because of funding costs catching up? The other question is on credit cost. You talked about the SP getting to through cycle averages next year. Granted things are very volatile, but just want to understand how we should think about that big GP overlay that you have and how willing you would be to use that to kind of stabilize overall credit cost. Then the third question is just on dividend.
You know, you're looking at ROEs at over 15%, loan growth slowing CET1 above your target range. Implies you could pay a much higher dividend than you have now, and still be building capital. Just wanna get your thoughts on how to think about the dividend.
Okay. Because the three questions. The first on the NIM. It's very hard to definitely figure what the back end of next year might be. What you said is correct. I think deposit rates will continue, the cost of funding might continue to go up, but even that will start moderating. We are seeing it pick up now. Our you know, our deposit beta till the end of the third quarter were sub-25%. By year end, I think they'll get into the 30s%, close to 35%. Next year by middle of the year, I think they will get up into the mid-40s%. But I think they'll probably start leveling off at that point. Like I said earlier, we have you know, some tailwinds and headwinds. The tailwinds come from the repricing fixed rate loan book.
It's SGD 180 billion, some 1/4 of that effectively reprices next year, another 1/4 reprices the year after that. That obviously gives us some pickup as that repricing happens. But the other part of this, the real drag, for us is, like for many other people is the treasury book. The funding cost, the treasury book is funded in the market, and so there is a drag on the treasury book from funding. Right now because I see, you know, we modeled at 4.75%, now Powell is looking more like 5% from yesterday's statement. My own sense if you get to those levels, you will probably come and plateau at around these levels, 2.20, 2.25 levels, at 4.75%.
We might stick around at that level for some time, I think. Your second question on credit cost. Look, it's really hard. You know, all we're trying to do is make sure that we have, you know, what Jamie Dimon sometimes called a fortress balance sheet. Just because of the complete uncertainty in the environment in a 5% interest rate scenario. Therefore, like I said, our SP is this year only eight basis points. If you ask me based on a bottom-up view, I don't see them increasing. I've not seen stress anywhere.
When I sit back and take a top-down view and say, what happens if 5% interest rates in terms of likely recession, likely slowdown, likely, you know, jump in debt servicing, you have to expect that there will be some impact of that when you look down top-down. You know, in my own planning and budgeting for next year, I said let's just go back to assuming that we hit the 17-20 basis points kind of SP, which we assume is a through cycle number. Now, on GP, you're correct. We have a lot of cushion. We have SGD 3.9 billion. Like again, I said in the call, in the first three quarters, the model GP number has been reducing.
It reduced by SGD 150 odd million in the first half of the year, and it reduced by another SGD 200 million in this. Because the model GP also reflects the underlying portfolio. Underlying portfolio has been continuing to improve, and therefore the model GP has been coming off. We just took the opportunity to add the overlay to take the GP level back to where we were at, SGD 3.9 billion. Now, what that means is that our total overlays are about SGD 2.1 billion. You know, we have SGD 1.8 billion is the model number, and SGD 2.1 billion is the overlay number. To your question, yes, the idea behind the overlay is exactly that we will use it to and release the overlay if we need to be able to moderate our provisioning level.
Frankly, if the world looks much better than we think it is right now, we will probably release it, irrespective. If the world looks worse, then this extra cushion that we have allows us to you know moderate and manage the income more sensitively next year. The last question on dividend. You know, the dividend I noticed a couple of people said, "Well, you know, why is dividends low?" Frankly, I've been quite clear. I've been saying this from the second quarter itself, that we recognize we have a lot of capital, and we recognize that you know we have the capacity to pay more, but it is something that we'll evaluate at the end of the year.
You know, it is not something that we are ever planning to do in the third quarter. I think, perhaps for some reason, this is a misreading of a statement of intent. We will look at it at the end of this. If you look at our history, we've always done our dividend moves by and large at the end of the year. That's what we will look at. Like I said, all the things you've mentioned are correct. Our capital rates are high. We're above management operating range. We actually, if we go into Basel IV, we create even more capital, and our loan growth outlook is not humongous. We do have the capacity to return money to shareholders. It's a timing question, really.
Got it. Thanks, Piyush.
Thank you. Our next question is from Jayden Vantarakis from Macquarie. Please go ahead.
Hi. Can you hear me okay?
Yes.
Great. Thanks for taking my question and well done on a really strong set of numbers. My questions are on the same topics as Nick, so forgive me if I'm just going into some more detail on a couple of them. Previously you had a really helpful NIM sensitivity where you said SGD 18 million-SGD 20 million of revenue for each basis point, and I understand there's some nonlinearities. Can you update us on what that might be, you know, in the current sort of rate environment and what that new sensitivity may be if you're able to? The second question I had on credit risk is you must have done some sort of scenario analysis in terms of what the outlook may look like. What would you say a bear case could be for that credit charge? Those are my two questions. Thank you very much.
On the first, you know, you're right, it's nonlinear, and that's part of the problem. You know, so far, till the end of September, the SGD 18-20 million has been holding despite the bigger drag on Treasury. But as you look out, that number changes. I think one way to think about it, and it's not linear, but I'll say one way to think about it, is that, you know, whatever we've been able to lock in so far is locked in. That from here on, as rates go up, the sensitivity drops to about half. From SGD 18-20 million, it drops to about SGD 10 million per basis point, but for the delta, not for the stock. That's really not how it works.
You know, that's an easy way to model, and I figure it's a way for me to understand. In reality, what happens is even your stock reprices, but the delta doesn't actually. It's not like in the delta you pay up so much, but that's a good way to model it, if you want to figure out the model. A different way to model is this, deposit beta idea. You know, our deposit beta is odd 23% , so far. I think by year-end, with what's happening in the environment, that deposit beta is probably going to get closer to 35%, from 25%-35%. Our assumption right now is as you look into next year, by summer next year, it might get up to 45%.
If you triangulate the 9%-10% for the delta and this deposit beta idea, they give you about the same number. That's two different ways of thinking about where this might wind up. When you put either of those prisms and you work it back into NIM, you get that kind of NIM that we're talking about ±2.25%. Hopefully that's helpful. Your second question was on cost of credit. You know, all the scenario planning we're doing right now is not giving us any line of sight to a material deterioration in credit. That's one of my big challenges. You know, nobody's seen a 5% interest rate environment.
If you look at our book and look at, you know, the underlyings of the book, the large corporate book, which is a, you know, big chunk of our loan exposures, continues to be very solid. It's very pristine. My own sense is that even at 5%, we don't see pain in that book. We've talked to a lot of clients, we've talked to sectors, industries. Some of them are benefiting after COVID. By and large, I think the large corporate book is quite resilient. If you look at our SME book, that's about a SGD 40 billion book, 10% of our total book. Now, that's the one I'm more uncertain about because at 5% interest rate cost, SMEs hurt a lot.
Having said that, we've tested that book at 6% and 7%, and we didn't see a lot of damage. I think part of that is because in the last three four years, we've really ring-fenced that book a lot, you know, with the China issues in the past, the TMT supply chain, you know, the COVID. That's a very seasoned book. When we do the bottoms up on that book and build up, you know, even that's not extraordinarily large, SGD 200 million-SGD 400 million potential cost of credit when you do it bottoms up. On the consumer book, the mortgage book itself is also quite solid. You know, our mortgage, the bulk of it is in Singapore.
As you know, we've always done even going into loans, we've done 3.5% interest rate assumption. We now do 4% interest rate assumptions, and our loan-to-value in that portfolio is very low. It's overall, at a portfolio level, it's about 50%, loan to value. So again, when you bottoms up, I don't expect a lot of damage in that book. Again, historically, over the last many decades, we've not seen too much damage in that book. There's the unsecured consumer book. That's about SGD 10 billion. Half of that is in Singapore, which is actually very well controlled.
In that book, consumer, because some of the rates are capped, credit card rates are capped in some markets, unsecured loan rates are capped, the consumer doesn't really wind up suffering a lot on direct payment. The bank takes a squeeze on margin. You have to take into account that disposable income of consumers will be affected overall in a 5% environment. You should expect a delinquency pickup in that book. The reason I'm going into some detail is when I do the same bottoms-up, you know, I find it hard to even get to my normalized credit scenario, right? My 17-20 basis points, I'm not even seeing that. I'm just being cautious because, you know, there are a lot of unknown unknowns in a 5% world. What happens is so uncertain, I'd rather be cautious and be prepared for things that we've not foreseen or forecast.
Okay. That's really helpful, Piyush. I really appreciate it. Thank you.
Thank you. Our next question is from Nick Lord, Morgan Stanley. Please go ahead.
Thank you very much. I have a couple of questions, actually. I'll come back on the credit quality. Just first of all, on that NIM point on the trading book, being funded. I think some of the other banks who reported have said that that then plays through in higher trading income. The net income benefit is zero. Would that be true for you as well? As that trading book funding cost goes up, we'd also expect to see your treasury and trading income go up by a similar amount?
Nick, we saw some of that this year. If you look at our overall treasury book, our guidance is that trading income should be about SGD 275 a quarter. If you look at this quarter, it's about that, SGD 265 or something like that. Yeah, we saw a drag on the funding cost, but we made it up on the other income line, and that's correct. As you look forward, it's not clear to me it's a one-to-one correlation. I think some of the, you know, what you give up on the funding cost, you make up on the other income side, but there's obviously volatility in that number. I still think that we should be able to stick to the SGD 275 a quarter overall guidance. I'm not changing that guidance, but you could see choppiness in that from quarter to quarter.
Okay. Okay.
Nick, since we don't actually show the full performance summary, if you had seen the treasury customer segment income, the trading component quarter to quarter would be quite flat, close to SGD 265 million for the last quarter. What you see under the strong other income line, in addition to this shift between NII and non-NII, which is about SGD 100 million, the other component is actually stronger customer sort of treasury income. That's what you're actually seeing, that the customer treasury income has also been stronger.
Okay. Perfect. Thank you. Just coming back on credit quality and really following up on Jayden's question, and I think you gave us a pretty clear idea of some of the transmission mechanisms. I mean, to me it seems like there's two potential risks for you. One would be that interest cover begins to fall because EBITDA comes under pressure and rates have gone up on the corporate side. I guess there's a risk around property exposures, because presumably as rates go up, property prices start to or asset prices start to come down. Have you thought about those? Can you give us any metrics, for example, on what the interest cover is on your book or what percentage of your book has stressed interest cover or anything like that?
Also, if we did start to see property prices moving down materially, especially in the commercial space, you know, are there levels of price decline that would begin to cause problems for you in your book? I'm thinking commercial property rather than residential property here.
Yeah. Nick, I don't have the data on the interest cover, though obviously we stress tested it and we can get somebody to pull that out. When I said that the, you know, large corporate book and this thing is quite pristine, it's because we're not seeing a large number of companies going through this stress and interest cover. We stress test at $200 oil price, we stress test at high interest rates, we stress test, you know, weak currencies. There's only a handful of names, frankly, that we think run into our watch list, which captures all of this. Total names in our watch list are about 4%-5% of our portfolio right now.
The watch list names are the ones where we think that interest cover, debt service cover, et cetera, it'd be something that we'd have to watch for. So it's not a big number, but I can get somebody to get that specific thing for you. On the property price decline, the reality is our cushions are very good. So apart from the mortgage book, even on the commercial property side, our loan to values are generally quite low. Therefore, our stress testing both in Hong Kong and Singapore, where a large part of our, you know, collateral is commercial property, up to a 30% drop in commercial property prices doesn't really create a problem for us. We still are in the money.
Okay. That's perfect. Thank you. Then finally, just on capital, in terms of mechanisms for returning capital, can you just I mean, obviously your share price is quite high, so I don't know if share buyback sort of work on that basis, and there's problems with dividend and dividend sustainability. I guess if you're talking fortress balance sheet and if other people in your sector haven't got fortress balance sheets, but after a year of downturn, you might be in a good position to do M&A. Can you just talk about mechanisms of returning capital and how you might be able to use a strong balance sheet over a downturn scenario to add value longer term to the group?
I'll speak on the second part of the question first, the M&A. You know, we don't see deals in the last couple of years, and we're still absorbing them. LVB, like I said, is integrating well, but we still have to extract value from the deal. We've got our hands pretty full in India for the next year or two. Taiwan will only integrate by August next year, so I think we have our hands full with that for a period of time. You know, we're still consistent with our long-term philosophy. We're not looking at doing an earth-shattering M&A of large scale because we think there is still quite distracting to do. I don't anticipate too much on that front.
We're always open to bolt-ons, so if in the next year or two, you know, we get some opportunities. But those, as you know, as large a deal we've done is SGD 1 billion, right? Those are not going to be huge drains on capital as we look for those opportunities, whether they're, you know, a line of business opportunities or, you know, fintech-led opportunity. But they're not going to be massive drags on capital. Then what do we do with the surplus capital? You correctly said, we've got, you know, effectively three choices. We want to return some capital. We can increase our regular dividend, we can, you know, pay a special dividend, or we can do share buyback. In fact, everything, you know, everything's on the table.
As you correctly said, share buyback at our current stock price and valuation might not be the most attractive path. Again, I hasten to add it's not something the board has, you know, reviewed. It is something we will do between now and the end of the year.
Okay. Perfect. Thank you very much.
Thank you. Our next question is from Yong Hong Tan, Citigroup. Please go ahead.
Thank you. I have a couple of follow-up questions on the interest margin. The first one is, if possible, to give us indication of where October or September exit margin is for you. And also, I didn't catch on the media call 100%, the part of the portfolio that can reprice. Can you just, you know, repeat what you said, in terms of what is the quantum of the book that can reprice, over the next one or two years? So that is on the net interest income side. And I have a question on cost.
I think we.
Sorry. Go ahead.
We spoke about this last quarter.
Please.
Yeah. I said that we are likely to end up with a NIM of around 2%, sometime between the third and fourth quarter. I think we are currently at very close to 2% at the moment. Yeah.
Yeah.
That includes the drag from the Treasury & Markets, NIM.
On the SGD 80 billion, you want to give the most, I give them half enough. You want to give the specific details of SGD 180 billion, what we get.
For the SGD 180 billion, I think we are very sort of. You're talking about the,
Book that reprices.
The book that reprices. Up to sort of end of this year will be about SGD 60 billion, and then 2024, I think we'll see another SGD 40-odd billion, and then the rest reprices after that.
The nature of the book, like I said, about half of it is loans and I think SGD 80 billion-SGD 90 billion and about SGD 70 billion-SGD 80 billion is securities. There's a ton of securities and there's about SGD 30-odd billion of interest rate swaps, the hedging that we do to build duration. It's all of.
You are talking about the composition of the SGD 180 billion. SGD 80 billion is in fixed rate loans, SGD 22 billion in fixed rate mortgage, sort of fixed rate, fixed deposit rates for mortgage. That's SGD 22 billion. We put on interest rate swaps of about SGD 33 billion to convert floating rate loans to fixed rate. We have a corporate treasury portfolio of SGD 46 billion. That's the composition of the SGD 180 billion.
Understand. Thank you. Very clear. I have a question on OpEx as well. Clearly inflation is running high in Singapore. We see that translating into the staff expense increase. Assuming next year the asset quality environment remaining relatively benign and then the benefit from higher margin, just wondering, you know, what kind of cost inflation are you thinking about for next year?
I think you should be expecting what we had in the third quarter, the 9%-10% kind of cost growth for next year. Just because where inflation is and CPI is, wage growth will continue to be somewhat stronger.
I want a lot of visibility in terms of OpEx trends beyond 2023. Assuming that margin expansion kind of slow down after 2023, can cost growth moderate after that?
Well, you know, the cost is a function of a headcount and wage levels. You know, we keep driving efficiency in the business. As I've said before, we have a strategic cost management agenda. We've added a lot of people into technology. Some of them are one-timers. We've added a lot of people for Lakshmi Vilas and for integrating of Taiwan, 700-800 tech people, for example. Those will run off and we expect them to, you know, rationalize by the end of next year, for example. Yeah, we do have some levers to be able to bring costs down.
Again, if you look at our history, we said every time we have the opportunity and, you know, we get improvement in margins or tailwind, we are willing to invest a little bit more on some of these activities. Then when things are slightly tighter, we have got continuously been able to discipline our costs, and bring them back. I think we know how to do it.
Great. Thank you. Okay.
Thank you. Our next question is Weldon Sng, HSBC, please go ahead.
Hi, can you hear me?
Yes.
Thank you. Thank you for taking my questions. Can I just ask NIM sensitivity? I think previously you've guided that that guidance translates roughly to about six basis points per 25 basis points Fed rate hike. If we take your 2.20%, I think 2.26% guidance at the middle of next year, that implies sort of 3.5% on the upper bound, which is what you know you've said previously that that is what the sensitivity should last up to. I'm just trying to understand your 2.25% guidance. Is it that you are just taking the sensitivity up to that point and then saying that from then on it'll be less? Or you know what can you give some color on that one?
Well, I just gave two prisms on how I think of sensitivity. I don't do the math, you know, six basis points per 25 basis points. Like, I don't use that prism, so I can't relate to, you know, how you think about it. I think the two prisms I gave you get to this thing. One, we look at, you know, what is the deposit beta, which means of whatever Fed rate increases that you see, how much you have to pay out for funding costs and deposits. That we see rising from about 25 to about 35 by year-end and to about 45 in middle of next year.
The other prism I gave you is that if you assume that whatever we have right now is locked in at SGD 18 million-SGD 20 million per basis point, then from here on, whatever rate increases you see, you should effectively take SGD 90 million-SGD 100 million per basis point on top of that. Both prisms will get you to around the 225 number. You can actually work it back and see what it means from your lens and the way you look at it.
Okay. Sure. Just on that, is it when you say peak at 4.75%, are you saying that it stays there for the rest of the year in your assumption?
Well, in our assumption, we assume they hit 4.75% and hold it. I don't see the Fed cutting rates next year. My assumption is that they get there and they hold all of next year. After yesterday, I would bet that Powell will get to 5%. The thing is that I don't see the Fed cutting rates next year. Even if you start seeing a slowdown in inflation, my base case is you start seeing cuts only in 2024.
Right. Okay. If you are saying that the rate, the Fed rate holds, then is it correct that in the second half there should still be some repricing that. The 2.25% is only a midpoint and there is upside to that in the full year's number?
What we don't know, and somebody asked the question before, I think there'll be some tailwind on repricing in the back end. At the same time, there might be some more marginal deposit repricing also when rates are at 5%. My current thinking is it'll probably wind up at a plateaued level at about that level.
Okay. Right. Yeah.
It also means the Fed hikes rates further. It peaks at 5% or even higher compared to the 4.75%. The opportunity for NIM to be higher would be sort of lifted as well, right?
Okay. Got it. I think just to answer the question on cost. Can I just ask for a bit more detail? Just to confirm, you're talking about that from this third quarter level, which seems to be just a higher base from the last quarter. Is this sort of the new base in which we should add the 10% addition into next year on a quarter basis?
No, I think we should look at a 10% growth on a full year cost basis.
Okay. Right. I see. I think you talked about inflationary pressures just now, but how is that also a lot of bringing forward the investments?
There is some of that. It is partly wage inflation, partly it's you know, these one-timers on the integrations we need to do, and partly we have brought forward investments because we have the top line to be able to afford it, particularly in the tech space, we have tried to do some of that as well.
Okay, sure, got it. Thank you.
Thank you. Our next question is from Harsh Modi, JPMorgan, please go ahead.
Hi. Thanks, Piyush. A couple of questions. More than a couple actually. First is on, could you explain a bit more on what changes have you made bottom up in terms of underwriting, over, let's say, last two, three years, which gives you comfort that even if things go to, if we are in a reasonably tough environment, we'll only hit 20-25 basis points of provisions and not, let's say, a 50 basis points?
Harsh, you asked me this question the last time as well. You asked me this question twice before, and I've given you a detailed and elaborate responses twice before on why we think our credit underwriting is better. I can redo it for you if you like. There's two, three big changes we've done which are giving us value. The first is we tightened our entire target market on, including our risk acceptance criteria, across the board, both at industry and segment level. We reduced our obligor concentration caps, for example. If you look at the 2015, 2016, we took some large hits in oil and gas, where we trimmed down all our exposure to those kinds of midcap names, and we changed our TMRACs around that. There's a material shift.
The second thing is we dialed up our industry focus. We had some industry expertise, but we really built much stronger industry expertise, and we aligned it all the way down. Earlier, our industry expertise was focused on the top tier companies. Now, both the midcap, actually even the SMEs, all aligned by industry. The industry people play a far more active role in both credit underwriting and portfolio monitoring. The process itself of how we manage that has changed quite substantially. The second thing that we benefited a lot from is much better use of data and analytics. We've dialed up massively, not just for underwriting, the algorithms for underwriting, but a large part of our focus has been on early warning detection and portfolio management.
Therefore, today, actually, we, you know, anecdotally, we today go and tell companies three months before they know that they're going to have a problem because our data analytics is actually, and our AI is helping us a lot to stay ahead of the curve in terms of understanding where the weaknesses might be and what we need to do with that. As we got into 2022, we also put a lot of technology into the end-to-end process. We don't have. You know, we have much better measurement of the issues and much better end-to-end capacity to see through what we have and where we are. The other thing we've done in the last four years, we started churning our portfolio a lot more actively.
We actually sell down a large part of our exposure, instead of keeping them all on our books. If you look at the collective of that, you can see that showing up in our credit process. The reason why we changed our guidance from what used to be 20-25 basis points to 17-20 basis points in the last 2, 3, 4 years is that we are getting increasingly confident that the sum total of all the changes we made, are coming through in the way, the business operates.
Thanks, Piyush. I know we had that conversation two years ago. A follow-up. This watchlist of 4%-5% of the book that you alluded to, have you had any discussions with some of these guys saying that you may be at risk? And are you at a point where you have started talking about restructuring some of those higher risk borrowers?
The higher risk are very small, right? Yes, of course, we talk to them. The biggest part of the 3%-4%, maybe 3% or 3.5% out of the 4%, is my first category of just monitoring them, because of the environmental conditions, right? There's nothing in their numbers or the data. But it's a macro environment thing, but we put them into the watchlist anyway, to take a look at. You know, we have amber and weak, these things. The ones, the bulk of it, 90% is probably amber. It's only 10% in the next two categories. Those, of course, we talk to the company and see what we can do about helping them restructure or stay out of trouble. Yes, we do.
Right. Is it fair to say that we should see your stage two loans moving up over the next quarter or two?
No, we are not seeing that kind of migration. In fact, if you look at our sort of general provision portfolio improvement, it's been coming down. We said for nine months it came down SGD 300 million, and that's why we're able to increase our overlays by SGD 300 million. The underlying portfolio actually has been improving, and you're actually seeing upgrades. That's the reason for the portfolio improvement. It's hard to say next year, but so far our experience has been quite good.
Right. Okay. Second question is on Hong Kong property exposure. I know you said that even the commercial property exposure in Hong Kong looks okay, and I remember about a decade ago you had stopped doing mortgage in any large size in Hong Kong. Given whatever is your current exposure to Hong Kong property, how do you think about it? How much of that worries you? It's not the median exposure, it's probably more the 19th percentile exposure. What kind of numbers do you think we are looking at there, if at all, in terms of risk?
If you correctly said our mortgage book is quite small. I think it's SGD 6 billion or SGD 7 billion. The LTV on that book is 28% or something like that. It's up 30% LTV on that book. It's not been growing in the last few years in the book. On the commercial book, I'm trying to remember what our actual exposure number. I don't have it with me. I can come back to you on what the actual exposure number is. But the bulk of that is the high-end names. It's the, you know, the Cheung Kong and the Sun Hung Kai, et cetera. That's the bulk of our property book. It's, you know, generally, the borrowers are top-class borrowers.
We've done exactly this last month, which I should know the number. I forget it. We've done a complete review of that portfolio, and we're really not seeing any problem. The high-end names are very solid. We don't see any problem even with the drop in property prices in that end. We have some exposure in the next year, tier two developers, if you will. Those are well secured, LTVs are low. In our stress testing that we just finished last month, we didn't anticipate any problems with Hong Kong property.
Okay. The last question, Piyush, is on capital generation and distribution. Given that we have a bit of an RWA increase from mark-to-market and potentially credit migration down the line, despite a very impressive 15% ROE, what kind of capital can you generate? Again, distribution, should we think how sacrosanct is the 13.5% upper end or not? Or should we think more in terms of payout?
I don't need to think in terms of payout. Our, you know, operating range, we always guided between 12.5% and 13.5%. You know, we never said 13.5% is sacrosanct by itself. There's one other thing which you're not factoring into your calculation, which is Basel IV. The Basel IV impact on us is very, very material. Come January 1, 2024, our capital adequacy jumps to 16% because of the Basel IV impact. Therefore, when you think about the capital cushion and buffers we have, it's for between now and the end of the decade. We are looking at capital cushion buffers of 2%-3%, not decimals of percent.
What is MAF you think will allow you to pay out between now and let's say first January 2024, 200 basis points of capital?
Why you're assuming I want to pay out 200 basis points when you have to decide what I-
Exactly. If it is at year end 13.8% even after all the decline quarter-on-quarter, you are 30 basis points above, assuming you generate some in fourth quarter, and there's going to be reasonable amount of relief, as you said, in less than 15 months. How do we think about the quantum of capital that you can pay? Can you?
That I think that's.
Are you?
An appropriate question, and you should think whichever way you want to think. Even my board hasn't thought about it. You know, I've told you three times. You can put whatever you want in your assumptions. It's not. I haven't thought about it, my board hasn't talked about it. You can think whichever way you want to think.
No, that's fair, Piyush. I'm just trying to understand the guidance of 12.5%-13.5%. Are you going to stay with that guidance? Is the board willing to stay with that guidance? Or do you think, given that we are going into a bit of a downturn, that is fair to assume that you will have a buffer over and above 13.5%?
Harsh, let me just say what I just said. I mean, for some reason, you're very hung up because you assume third quarter you'd get some dividend increases. I don't know where you came up with that idea from. I have nothing more to add to what I've told you, right? I will tell you by the end of the year after we've deliberated with the board what it is that we're prepared to do and what we think is appropriate.
Got it. Thank you.
Thank you. Our next question is from Aakash Rawat, UBS. Please go ahead.
Hi. Can you hear me this time?
Yes.
Okay, great. Sorry, I had some technical difficulties earlier. The first question, I just wanted to follow up on the NIM sensitivity, Piyush. You mentioned about the deposit beta and obviously suggest that savings rates will go up, which is why sensitivity will be lower. I think the other variable is CASA outflow, right? If CASA outflow accelerates from here, then that sensitivity can further go down. I'm just trying to understand what your assumptions are on the CASA outflow bit. Do you think it will continue at the same pace? Do you think it will become slower or faster from here?
Actually, when I give you a sensitivity, I factor that in because I can always replace the CASA with FDs, right? When I talk about sensitivity, it's not just repricing the CASA, it is CASA moving. If you look at this quarter, we moved SGD 30 billion of CASA, we got SGD 30 billion in FDs more or less, right? If I need the funding, I can always price and get the FDs, but it comes at a higher price. Therefore, the interest rate sensitivity and the deposit assumes that that X amount moves into FDs and you pay a higher rate on FDs.
Okay, got it. The 25 to 35 to 45 assumes a certain amount of CASA outflow, which was baked in.
Moving into FDs.
Okay. Got it. Thank you.
Correct.
Yeah. Cool. Second question I have is on if I look at your ROE guidance, 15% plus comfortably, I think it still looks very conservative. If I even go with your base assumptions, I think the ROE could be a lot higher. I believe you're baking in some sort of, you know, best-case, worst-case scenarios for certain things like provisions, wealth management income. Could you help us understand some of the ranges in your mind around that? Like in a worst-case scenario, what could be the credit cost like? What could be your wealth management be like? In which case you get to 15%, otherwise you could be comfortably above 16% as well, I think.
What we baked into our thing, where I think we're comfortable above 15 is, you know, credit costs going back to the 20 basis points out of SP and some GP on top of that. I think it's a fairly conservative assumption. We might not need that kind of cost of credit, if you will. I think that's quite clearly an upside opportunity on the, you know, numbers that we're looking at and talking about. In terms of growth, you know, we've been continue to bake in a mid-single digit growth environment and low double-digit growth in fee income. Like I said, our wealth income dropped by 20% this year. If the environment turns around to be positive, there's no reason we wouldn't get back to, you know, our previous wealth income levels, right?
Frankly, we've got another SGD 20 billion of net new money, so it adds up on top of that. It could be much stronger. But again, it's gonna have to depend on a far more helpful external environment. Right now, we're assuming that, you know, the environment doesn't fall off a cliff from here and you see some more distinct, so you can get to a low double-digit growth rate. That's another example of if you want a range, it could get worse. I doubt it. We've been conservative. It could get far better than what we forecasted.
Got it. On the mechanics of capital payout, you said all options are on the table, including a special dividend. If I look back, I think DBS has rarely done a special dividend. Is this special dividend more linked to the Basel IV expectations, which only happens in 2024? Or even let's say if Basel IV implementation were to get delayed, would you still consider a special dividend?
Yeah, I think we have enough capital without Basel IV, as well. By the way, we did do a special dividend five years ago. I think we did SGD 0.50 or something . It's not that we've never done one. It's not something we normally do, is correct. Our current outlook is that we do have a fair amount of capital even prior to Basel IV.
How would you go about thinking between core dividend increase or a special dividend? I'm just trying to understand, like, which way would you lean and why?
Well, our core dividend philosophy has always been this. I don't want to wind up at a core dividend level that I need to backtrack on. Other than when the regulators ask us not to, our policy is to try and keep it consistent. Therefore, when we think about core dividend, I don't want to jack it to a level where, you know, in a subsequent year or subsequent quarters, then I got to go back and rethink that number. I'd like to keep some cushion on the core dividend side.
Okay, got it. Just finally, I might have missed these comments earlier. The trading income gains that we had this quarter, could you give some color on, like, what was driving it?
You know what?
I think I will recap what I said earlier. Trading income is quite strong. You see in the numbers, I think we had an over 30% increase, but maybe that's the number that you're looking at. A few components. One is actually the T&M, where the net interest income, where we said there's higher funding costs, is actually reflected in the gains on non-interest income. That's about SGD 100 million switch between NII and non-NII, with T&M overall income being flat. Then we also have customer T&M income, both from institutional banking sales and consumer banking that forms the larger part of the remaining increase.
From a debt standpoint, you know, equity has been challenged. Rates and FX has continued to do well.
Okay, got it. That's all my questions. Thank you.
Thank you. Our final question is from Tejkiran Magesh, White Oak Capital. Please go ahead.
Hi. Thanks for taking my question. This question is about the acquisition of Citi assets in Taiwan. How easy or difficult is it going to be to, you know, get the book directly? In a sense, do you have to reach out to all of these customers and get their consent before onboarding them onto the DBS platform? Secondly, once you onboard these customers, it's quite possible that the behavioral scorecard that Citi used and that what you will use will be quite different. How are you going to treat the churn of the customers based on your risk appetite? I guess I'm just looking for if you have any idea of what percentage of the Citi book do you expect to hold on to at the end of maybe 2023 or 2024?
Do you remember the assumptions?
I don't have the number offhand, but I think we have got the contract which allows us to sort of adjust AUM. Citi is very motivated to make sure that at the point of transaction and now is keeping to those numbers.
That concern is after we get the. I don't have the numbers offhand, but you know, when we model this thing, we actually did two things. One, we compared you know, we have a lot of Citi people in our system, for example, including people from the credit team. So we had a very good sense of their underwriting, both the scorecard, FICO model. They're very similar and consistent with our risk appetite. Nevertheless, when we do our modeling, we assume I'm trying to remember, 15%-20% customer attrition and staff attrition. That's what we typically put into the M&A deals. Again, I think somebody can get back to you on what the exact assumption on those numbers is.
Sure, sure. Thank you. Regarding consent, is there a legal or regulatory requirement to ask to get the consent of all these customers before onboarding them?
Not that I remember.
Because I assume you'll be reissuing it.
No, no, not that I remember. No.
Okay. These customers will be getting a DBS credit card in place of the Citi credit card once they've been onboarded, right?
Correct.
Got it. One final question, if I may, about the 1.5x multiplier that MAS has applied on the operational risk capital. Please tell us, is that multiplier has it expired or do you have any visibility regarding that?
It hasn't expired. I think MAS will do a review in the early part of next year. We'll see after that. My own expectation is that in the first half of the year, that should be fine.
Got it. Thank you so much.
I can't speak for MAS. MAS has a lot to consider.
Yes, of course. Thank you so much, and congratulations on this acquisition.
Thank you. Ladies and gentlemen, we have now come to the end of the Q&A session. This concludes today's conference call. Thank you for your participation. You may now disconnect.
Thank you.