DBSDF - DBS Group Holdings Ltd (DBSDF) Q1 2023 Earnings Call Transcript

2023-05-02 04:39:02 ET

DBS Group Holdings Ltd ( DBSDF )

Q1 2023 Earnings Conference Call

May 1, 2023 22:30 ET

Corporate Participants

Edna Koh - Group Strategic Marketing & Communications

Chng Sok Hui - Chief Financial Officer

Piyush Gupta - Chief Executive Officer

Conference Call Participants

Chanyaporn Chanjaroen - BQ Prime

Goola Warden - The Edge

Presentation

Edna Koh

Good morning and welcome to DBS First Quarter 2023 Financial Results Media Briefing. Joining us on the line today we have our CEO Piyush Gupta, and CFO Chng Sok Hui. To start Sok Hui will take us through the first quarter highlights followed by Piyush who will give additional color on the quarter and [indiscernible].

We will be sticking to presentations slides and will be found in our DBS Investor Relations website. Following that, we will open the call for Q&A.

So without further ado, Sok Hui, please.

Chng Sok Hui

Thanks, Edna. Good morning, everyone.

We will start on Slide 2, for those who have a deck in front of you. We achieved another record performance in the first quarter. Net profit grew 43% from a year ago to 2.57 billion. Return on equity reached a new high of 18.6%, more than a percentage point above the previous record of 17.2% in the previous quarter.

Total income increased 34% to 4.94 billion from a 66-basis point improvement in net interest margin as well as healthy business momentum. Loans grew 3% of fee income trend improved. Commercial book total income rose 44% to 4.67 billion, while Treasury markets trading income normalized to 269 million in line with our guidance of 1.1 billion of trading income per year.

The cost to income ratio improved 7 percentage points from a year ago to 38%. Asset quality was healthy, specific allowances were 6 basis points of loans. General allowances of 99 million were taken as a prudent measure to strengthen general provision reserves. Compared to the previous quarter net profit rose 10% as total income was 8% higher.

Commercial book total income rose 6% from loan growth of 1%, a NIM increase of 8 basis points as well as fee income growth of 29%. The balance sheet remains solid. Deposits were boosted by flight to safety inflows in March, including for wealth management net new money. Non-performing assets fell 3% from the previous quarter as new NPA formation remained low, and was more than offset by repayments and write offs. The CET1 ratio was at 14.4%, the board declared a dividend of $0.42 for the first quarter.

Slide 3 compared to a year ago commercial book total income rose 44% to 4.67 billion net interest income grew 69% or 1.38 billion to 3.38 billion from loan growth and a net interest margin increase of 104 basis points. Net fee income fell 4% or 14 million to 851 million as higher card and investment banking fees were offset by declines in other activities. Other non-interest income increased 22% or 78 million to 432 million from higher Treasury customer income.

Note that Treasury customer income is reflected in other income of the commercial book. For the Treasury markets trading income is featured separately, and the Treasury markets income. Treasury markets trading income normalized to 269 million in line with guidance. Expenses rose 14%, or 238 million to 1.88 billion led by higher staff costs. The positive [indiscernible] of 20 percentage points resulted in a 7 percentage point improvement in the cost to income ratio to 38%. Specific allowances fell 105 million to 62 million, or from 15 basis points of loans a year ago to six basis points as asset quality remained resilient.

General allowances of 99 million were taken as a prudent measure to strengthen general provision reserve. There had been a write back of 112 million a year ago.

Slide 4, compared to the previous quarter, commercial book total income increased 6%. Net interest income fell 1% in nominal terms and rose 2% on the day adjusted basis. Loans grew 1% or net interest margin increased 8 basis points. Net fee income was 29% or 190 million higher with a growth led by wealth management, investment banking and loan related fees. Other non-interest income rose 35% or 112 million from higher Treasury customer income.

Treasury markets trading income was 32% or 65 million higher from the seasonally lower fourth quarter. Expenses fell 4% or 81 million due to non-recurring items in the previous quarter. Expenses were stable on an underlying bases. General allowances of 99 million were taken compared to a write back in the previous quarter. Specific allowances were unchanged at 6 basis points of loans.

Slide 5, commercial book net interest income rose 2% on a day adjusted basis from the previous quarter and 69% from a year ago to 3.38 billion. Net interest margin rose 8 basis points from the previous quarter and 104 basis points from a year ago to 2.69% as assets repriced, with high interest rates partially offset by higher deposit costs. Treasury markets net interest income was a negative 113 million as explained in the previous quarter, this is due to net interest margin compression for its fixed income instruments as well as higher funding costs for its non-interest bearing and mark-to-market assets, which are generally offset in non-interest income. Therefore, Treasury markets total income, net interest income plus non-interest income is a more accurate reflection of its performance. This quarter's 269 million was in line with our guidance of 275 million per quarter.

Combining the commercial book and Treasury markets, the group's net interest income grew 50% from a year ago to 3.27 billion, our net interest margin rose 66 basis points to 2.12%, compared to the previous quarter and the group net interest income grew 2% on a day adjusted basis, while net interest margin was 7 basis points higher.

Slide 6, loans grew 1% or 4 billion in constant currency terms during the quarter. Non-trade corporate loans rose 4 billion led by Singapore real estate acquisition financing. Trade loans increased 1 billion. Consumer loans fell 1 billion due mainly to wealth management loans.

Slide 7, deposits rose 1% or 5 billion in constant currency term during the quarter. As in the past year, CASA deposits declined during the quarter as customers switched to higher yielding instruments such as T-bills and fixed deposits. We saw flight to safety inflows of deposits and wealth management net new money in March as a result of market events. Net new markets flow almost doubled to 3.6 billion in March, compared to a monthly average of 2 billion in 2022. For the first quarter, net new money inflows totaled 6.2 billion. Our liquidity remains strong with the LCR of 147% and NSFR of 118%, well above regulatory requirements.

Slide 8, fee income. Gross fee income of 1.01 billion was slightly below a year ago, wealth management fees fell 11% to 365 million. Transaction service fees of 230 million were 4% below the record a year ago, but were in line with recent quarters. These declines were offset by 21% increase in cut fees to 227 million. Fees from non-trade activities and investment banking was stable, compared to the previous quarter gross fee income was 1/5th higher due partly to seasonal effects. Fees from wealth management, investment banking and non-loan related activities were higher. Card fees declined due to higher year-end spending in the fourth quarter.

Slide nine, this chart which we have introduced shows the year-on-year percentage changes for total net fee income as well as for the two major drivers of fee income over the past year, which are cuts and wealth management. Total net income shown on the page 9 fell 20% in January, continuing a trend of year-on-year declines in the first half and second half of 2022 when it fell 9% and 16% respectively. The declines reversed in February and March when total net income rose 9% and 1% respectively. As a result, total net fee income in the first quarter was 4% lower compared to a year ago at 851 million as shown in the earlier slide. Costs continue to grow strongly in the three months of the first quarter, sustaining the double-digit growth in the first half and second half of 2022.

As shown in the slide previous slide card fees for the first quarter rose 21% from a year ago to 227 million. Wealth management which is the largest component of fee income, shown in a gray stack fell 29% in January in line with the declines in the first half and second half of 2022. The declines were due to base effects on the war in Ukraine and the subsequent concerns over inflation and the pace of interest rate increases which affected wealth management activity.

Wealth management fees were flat in February and March versus a year ago. As shown in the previous slide. wealth management fees for the first quarter fell 11% from a year ago to 365 million.

Slide 10. The first quarter cost to income ratio, which have been higher than 40% in recent years, improved to 38%. Compared to a year ago expenses were 14% higher at 1.8 billion. The increase was left behind staff costs compared to the previous quarter expenses fell 4%. We've taken non-recurring items in the fourth quarter including an accelerated depreciation for some fixed assets, and a special award to staff. Expenses was stable on an underlying basis.

Slide 11, asset quality remained resilient, non-performing assets fell 3% from the previous quarter to 4.95 billion. New non-performing asset formation was offset by repayments and write-offs. The NPL ratio was unchanged at 1.1%.

Slide 12, specific allowances remain low in the first quarter at 62 million or six basis points of loans. They were stable from the previous quarter and 2/5, the level a year ago.

Slide 13, total allowance reserves stood at 6.27 billion with 2.44 billion in specific allowance reserves, and 3.83 billion in general allowance reserves. During the quarter, general allowances of 99 million were taken as a prudent measure to strengthen reserves. Allowance coverage rose 127% and 229% after considering collateral.

Slide 14, other comprehensive income was positive in the first quarter partially reversing the losses for full year 2022. With the changes due to cash flow hedges and fair value through other comprehensive income, debt instruments as interest rates ease. Other comprehensive income from cash flow hedges was 445 million. Cash flow hedges of 33 million or 6% of the commercial book and are used to transform floating rate loans to fixed rate, interest rate swaps to stabilize net interest income. The swaps are mark-to-market, while the loans are not. This accounting asymmetry creates artificial volatility to other comprehensive income which reverses over the life of the swaps.

Cash flow hedge reserves do not affect capital adequacy computations. Other comprehensive income from heavy OCI debt securities was 292 million as bond prices improved. The remaining other comprehensive income items recorded a loss of 223 million, they mainly reflect the impact of foreign exchange translation from investments in overseas branches and subsidiaries.

Slide 15, our fixed income investment portfolios amounted to 104 billion divided almost equally between fair value to OCI and helped to collect which are accounted for at amortized cost. Government securities accounted for 51 billion or half of the portfolio. Singapore and U.S. government securities amounted to 28 billion with the remainder spread among the other major markets we operate in, as well as Japan. Supranational and other bank securities accounted for 16 billion of the investment portfolio, the remaining 37 billion is in a bonds of our corporate customers, which we are familiar with. These bonds are supplementary exposures to our loans to them. The weighted duration of the investment portfolio is short. It was under two years for the fair value through OCI portfolio and 3.6 years for the help to collect portfolio.

Of the total portfolio of 104 billion, 87 billion are high-quality liquid assets as defined under Basel rules.

Slide 16, the group's CET1 ratio declined 0.2 percentage points from the previous quarter to 14.4%. Profit accretion was offset by fourth quarter ordinary and special dividends of $0.92 per share as well as higher risk weighted assets. The CET1 ratio of 14.4% remain above our operating target range of between 12.5% to 13.5% for the leverage ratio of 6.4% was more than twice the regulatory minimum of 3%.

Slide 17, the board declared a dividend of $0.42 per share for the first quarter unchanged from the previous quarter. Barring unforeseen circumstances, the annualized ordinary dividend is $1.68 per share.

Slide 18, in summary, our record performance, including achieving an ROE of 18.6% reflects the structural improvements we've made from our ongoing digital transformation, as well as the benefits of higher interest rates. Our ability to sustain business momentum, as well as customers trust during a quarter marked by market stress are the result of a solid capital position, prudent risk management, diversified business lines and nimble execution underpinned by an ongoing digital transformation.

Our business pipelines are healthy and asset quality resilient. Our multifaceted franchise strengths enable us to continue supporting our customers and delivering shareholder return. Thank you for your attention. I will now hand you to Piyush.

Piyush Gupta

All right, thank you, Sok Hui.

So I have three slides, one, some brief comments in the quarter and then a couple on the outlook. So the first slide is number two, as Sok Hui pointed out, our return on equity hit 18.6%. I just reflect on the fact that as you know, we took a gender provisions increase of about 100 million actually, our underlying models would have required us to reverse out 100 million. So we actually put in an overlay of close to 200 million in general provisions and just talk about it in a minute why we did that.

But if you assume that we hadn't taken that discretionary provisioning, our ROE would have been close to 19% actually. Our business momentum for the quarter was actually very healthy. I mean, notwithstanding all the stress and strain in the global financial markets. The corporate loan portfolio is done well. Sok Hui said [indiscernible] $4 billion. That's pretty solid. It was in real estate transaction in Singapore was noteworthy. But beyond that we grew in commodities. We grew in TMT fairly well diversified corporate loan growth.

We also saw some loan growth in trade but trade as you know, as episodic, so it depends on the pricing. The fee income was what was really pleasing to me. January was obviously on a year-on-year basis, still soft. And that's because of [indiscernible]. January last year was before the Ukraine war. So the numbers were high. But Feb and March for the first time in a year, our numbers came up to flat to last year's level. So we're not seeing the decline in fee income. And it was broad based, we saw the growth in wealth management, we saw the growth in card, we saw the growth in loans. So fairly solid progress with fee income. And net new money inflows continue to be strong. Last year, we averaged about $24 billion for the year. This year, first quarter, we continue to see that. We are a tad bit more than $6 billion of inflows in the first quarter.

Our expenses were well-managed quarter-on-quarter stable, the high number is really again, basically reflect as you remember, we did some salary actions in the middle of the year. So for the first half of the year, the number will optically look higher, but the second half of the year will allow us to catch up. So we still believe the full year should be okay.

And asset quality remains quite resilient. Our specific provisions as Sok Hui pointed out only 6 basis points. Our NPA has actually came down. The 1.1% number doesn't show it but they came down by $200 million to $300 million of NPAs. And that's actually partly because of low new NPA formation and also we getting repayments on some of our older NPAs. I guess you could ask, if that's the case, why are we adding up a couple of 100 million in management overlay. And the short answer to that is, this high interest rate environment is not precedented. And therefore, we're just being abundantly prudent and cautious in case there is some stress that comes out of the system in the later part of the year. There's nothing that we're seeing right now. And I can talk about that a little bit more. As I take it to the next couple of slides.

So we move to slide three, which is the outlook. The overall business momentum for the balance of the year, still looking relatively healthy, it's quite interesting. When you see a slowdown in the U.S. and Europe. Even in the West, I think there's a 50:50 chance that the economy, certainly the U.S. escapes a recession, it might have some really slow growth might escape a recession. Remember, a couple of quarters ago, recession was seem to be a certainty.

Closer to home, we think China 4.5%, 5% growth this year is quite likely, Hong Kong is seeing the positive impacts of a rebound within 3.5% to 4% growth, you will see over there. Even the other countries, the larger countries, India, 5.5-odd percent, Indonesia 5%. So by and large, this part of the world, Asia might be relatively resilient. Singapore is looking soft. Even Singapore leadership pointed out that we're likely to escape a recession through the year. So the large corporate loan book, I think is going to be relatively okay, our pipelines are looking healthy, we think we're going to get growth.

As I pointed out, trade is episodic, it goes up and down. And so it's difficult to forecast where that might wind up. Our moderation that I've referred to is, really two things, one in the consumer space, the mortgage book in Singapore as hopefully we get about $2 billion of growth this year. And on the back of the latest tightening measures, we might not be able to get to that number is still very early to call. Our bookings in the first quarter were beginning to turn around, couple of quarters after the tightening measures, in fact our bookings got back to a billion dollars a month. So it's actually quite optimistic. But we'll have to watch and see what the impact of the new measures are.

I do think it won't be draconian in the sense that, 88% of our book is first time buyers and the first-time buyers are not impacted by all of these new measures. So hopefully, it won't be a huge difference. But I do think we will see some headwinds in that space. The other space where we've seen some headwinds in the wealth management margin financing. The term loans we give for wealth management products, and the reason for that is people are quite well cashed up. And at these high interest rates, they'd rather put their own money to work than borrow from the bank.

In fact, in the first quarter of this year, as wealth management fees started going up, we started seeing people draw down from the deposit account into the investment account without actually borrowing so we might see some challenges and trying to grow that particular part of the book. And therefore, our loan guidance, I've said 3% to 5%, or mid-single digit is still kind of hard to say, we could be at the top end of that. We could be a tad bit lower.

The fee income growth also, as some analysts have pointed out, we've narrowed a little bit. I was hoping we'd be able to get double-digit growth, I now think we might miss that by a little bit. And this principally because of the turmoil in March. And the after effects of that, I think the wealth management by stabilizing the rapidity of change, the growth rates might not come through at the level at which we'd expect it.

Also investment banking, on a quarter-on-quarter and in fact, year-on-year, the investment banking was good, but some of that was early in the quarter. So January started off quite strong both for fixed income when we did some BCM stuff. In March, April, that's slowed down a bit because of the market condition, the market turmoil. We've done activity, but it's mostly been private placement activity on the fixed income side and more secondaries and REITs on ECM. So the uncertainty around the investment banking business is the function of what the markets are going to wind up doing over the next few months.

Nevertheless, underlying, some pockets are strong, cards is quite strong, and continues to be -- spend is up some 30% before the over the pre-COVID levels. And so overall fee income and cards is going nicely at 20% plus, I think that will continue to do so. Travel is beginning to continue to pick up as I pointed out before travel used to be about 15% of our card spend, it's still only at about the 12% level. So there is still some upside in the growth in the travel category. And that obviously is very attractive for fees.

Next slide. Our NIM, the area where we actually are a little bit short of what we're expecting is the NIM line. One of the things we showed NIM 212 for the quarter. And one of the big challenges we saw was in Hong Kong. HIBOR normally tracks the Fed rates, LIBOR and the Fed rates very closely because of the fixed exchange rate between the U.S. dollar and the Hong Kong dollar. This time around for this quarter, HIBOR is running some 50, 60 basis points below the U.S. rates. And this just because of a lot of liquidity in the Hong Kong market. Some of it, I think is because people have switched the borrowing to China onshore because it's cheaper to borrow China onshore. But the drag of 50, 60 basis points in HIBOR is causing NIM drag of between 3 and 4 basis points for us in our total book.

What that means is that, if it wasn't for the HIBOR break, the 212 would have been closer to 215 or 216 basis points. Now the outlook for HIBOR in the coming months later part of the year is still uncertain. The HKMA seems to be trying to reduce the aggregate balance in his account. But the high bar pickup is still very gradual and slow. So it's difficult to say whether we get any lift from there.

Overall deposit repricing continues, though it is slowing down, the bulk of our --we think 75%, 80% of the deposit repricing is done. But we still have another 20% odd to go which will happen slowly through the rest of this year. So there currently be some impact from that. On the other side, we're obviously benefited from the fact that about 22% of our commercial book is yet of the interest rate betting assets are yet to reprice. And that, we expect that to reprice a large chunk of that in the rest of this year and next year. And so we will get some cushioning of our NIM from the repricing of that commercial book.

We put all of that together, I do think NIM probably peak but I do think NIM decline will be very gradual. The last three months Feb, March, April, NIM has been pretty flat. It's in that 211 to 212 range. And so while I do see NIM beginning to creep down, it will be gradual. So overall for the year, we probably average somewhere between 205 and 210.

Expense, we're maintaining guidance between 9% and 10%. And therefore cost income ratio should be a nicely below 40%. Asset quality, we maintained SP guidance between 10 and 15 basis points. As you know, the first quarter is only 6. So we'd have to see a pickup in SPs in the second half of the year to get to the 10 to 15 range. And right now we're not seeing any signs of stress. Delinquencies are not up except in very small pockets in Hong Kong and China unsecured.

And therefore if I just look at the data, I don't see that SP coming through. The problem is because of the high interest rate and the slowing economies this SP number might pick up in the second half and so we are just being cautious as we come up with our forecast. And finally, when you put all of that together, we do think we'll get a full year return on equity, which is likely to be over 17%. So, overall, I'm hopeful that this will continue to be a solid year for the bank. So why don't I stop there? And we're happy to take questions.

Question-and-Answer Session

A - Edna Koh

Thank you, Piyush. Okay. We can now take questions from the media. So if you have a question, kindly raise your hand, you can find that in your reactions button. And we just give you a few moments to do that for the media. And when I call on you, then please accept the invitation to unmute yourself. And before you ask your question, kindly also state your name and the outlet that you represent. Let's see if there are any questions. First question to Chanya. Chanya, can you unmute yourself. And go ahead and ask your question.

Chanyaporn Chanjaroen

Eventually, hi. Can you hear me?

Piyush Gupta

Hi, Chanya. Can hear you?

Chanyaporn Chanjaroen

Hi, Piyush. Congrats on the numbers. I have three questions. The first one on Credit Suisse. On how much flows did you get from Credit Suisse wealth in recent months? And 3.6 billion net new money in March, how much of that came from the bank? And related question, did DBS sell Credit Suisse 81 bonds and you have a number on your clients loss from such bond? Second question, any update on your investigation into the March digital banking disruption? Third question, are you seeing much challenges from the banking crisis in the U.S.? Is it stopping at the JPM rescue of First Republic? Thank you.

Piyush Gupta

So, Chanya on the actual number that we got from Credit Suisse, we don't know. It's hard to estimate. I had indicated earlier that I think we've been beneficiaries in the last year of inflows because of the flight to safety. Some of those inflows are from North Asia. Some of those inflows are from other banks, including the troubled banks in the U.S. and Credit Suisse. But it's hard to unravel how much comes from where. So I'm afraid I don't have an answer for you.

On the 81, yes, we sell 81 as part of our overall portfolio to our clients. Total 309 billion of assets under management, about half of that are in deposit form, half of that are in assets. So call it about $150 billion in assets. And of the $150 billion assets, the Credit Suisse 81, I think is about 140 odd million of that. So it's like a tiny percentage of the total investment portfolio of our clients.

On the digital update is too early to say, we know what caused the problem that is still the access control and authentication servers. And there were some bugs in that application, which caused this to happen. As you know it is different from the previous incident because all of the measures we taken over the last 12, 16 months were helpful. But 50% or 60% of our customers were able to get in through the day. And we had to bring down the system for a couple of hours in the afternoon, just to bring it up to 100%.

As you know, there's a committee that has been formed, it's an independent committee being run by the board. We've appointed a third-party qualified person to review the incident. We're also engaging a couple of independent technology advisors for the committee. I think we should be able to get some insight into the committee's report in the next couple of months. I think, hopefully by July or so.

Your third question, the U.S. banking crisis, frankly, we've not seen too much direct impact of the banking crisis, anywhere in the world. Dollar flows still exist, dollar liquidity is still quite ample. And so we haven't seen any outflow of U.S. dollars from anywhere in the region. I think some of the challenges that you see whether it's First Republic or SVP and so on, fundamental challenges around interest rate, risk management, so managing the interest rate risk on your banking book. And I think all of these cases, they're almost idiosyncratic, the result of people assuming lower interest rate environment for a long time, and therefore, putting on very long duration for a large percentage of the book. Now, that doesn't apply to us. As Sok Hui pointed out, the duration of our book is under three years. And it's a small part of our book. It's not a large part of our book.

Chanyaporn Chanjaroen

I see. Thank you, Piyush. Just to recap on question about Credit Suisse. You said, you sold about 140 million Sing dollars 81 of Credit Suisse to clients. Is that the right number?

Piyush Gupta

I think that's about Correct. Yes.

Chanyaporn Chanjaroen

Okay. Okay. Thank you so much, Piyush.

Edna Koh

Thank you, Chanya. Next question to [indiscernible].

Piyush Gupta

Chanya, the better way to answer a question, our clients chose to invest in 81 that included about 140 million bucks of Credit Suisse, 81s.

Chanyaporn Chanjaroen

I understand. Yes. Okay got that. Thank you so much.

Edna Koh

Okay. Next question to [indiscernible] from Reuters.

Unidentified Analyst

Good morning. This is [indiscernible] from Reuters. I have two questions, basically. And the first one would be, why do you see NIM to gradually decline going forward? Is it because of the reversal in the interest rate hike cycle? And what's your view on that? And the second question is, would be more directly related to what happened like yesterday? What's your view on the latest, like the First Republic banks rescue in a collapse? And how -- what can we learn from this? Yes, thank you.

Piyush Gupta

On the NIM decline, I think, one of the reasons from the last quarter we started presenting our results for the commercial bank separately from Treasury and markets is, so to draw attention to the fact that the commercial book NIM is actually very robust and continue to grow. And that's because, assets keep repricing up and the spread in the asset book increases. What is happening, however, at these high interest rate levels, is that the Treasury and markets book is actually beginning to bleed. And if we look at last quarter and this quarter, both quarters, our net interest income and the TNM book is negative. So we actually running a loss in the TNM side. That's because you have to fund that these high interest rates and our TNM, therefore, on the interest rate income side, they lose money. They make it up on the non-interest income side, because TNM doesn't they don't think too much, and whether it's interest income, non-interest income. So they're actually making it up on the non-interest income side.

As Sok Hui pointed out, we should really look at TNM in totality, and in totality, they make about 275 million a quarter that's not changed. Is the split between interest income and non-interest income that changes. Now, TNM is for us a large portion of our total book is about 19% of the total assets of the bank. So the drag we get from the TNM portfolio actually comes through in our overall NIM.

Why do we think NIM is probably declining because the increase of rates is pretty much passed through. So we don't think feds -- the Fed funding is going to go up much more, maybe one more rate hike. The rate hiking cycle is pretty much done. We don't expect a reduction in rate. But what you will see is that they will continue to be deposit repricing. In the course of the last year about 90-odd billion dollars of our deposits repriced. And we think another $30 billion, $40 billion of deposits have to reprice in the balance part of this year. And that repricing means the cost of funding will gradually go up. Whereas what we charge customers is pretty much top-ish at this stage. So that will put some downward pressure on NIM.

On the other side, what happens is that as I pointed out, we have three years of duration in our book. In fact, the loan book is only 2.5. And so some of the loans will continue to reprice. Lot of them will reprice in the balance nine months of this year. Some will reprice next year and thereafter. So these are countervailing forces, the cost of deposits is going to continue to creep up. The loan book is some of it is going to continue to reprise. When you put all of that together and model it, we think that we'll start seeing a gradual decline in our overall NIM.

Your second question was First Republic. I thought I answered that for China. So I can maybe just reconfirm that if you look at the First Republic difference, basically, I can tell from reading their statement there, while SVB was impacted by the long duration of the bond book, First Republic is impacted by the loan duration of the loan book.

They have put out a very a mortgage book, which was an interest only non-amortizing mortgages, which are 15, 20 years in tenor and duration. So when you have these long duration assets, which can't be repriced, and your funding costs starts changing, then the economic value of that book starts suffering. So most banks have some duration. The question is always want to balance in our case, like I said, duration percentage of duration is short, it's south of 30% of our overall book. And the average duration is that under three years, and therefore, we don't see the same kind of impact that you would, if our duration was 10 to 15 years long, and it was 70%, 80% of our book.

Edna Koh

Okay. Next question to Goola. Goola, please unmute yourself and go ahead and ask the question.

Goola Warden

Congratulations on the record earnings. I have three questions. The first one is in terms of your own 81 and tier two. I think Sok Hui mentioned, I think about two months ago that there are plans to redeem those as you transition to Basel IV. But what will these be replaced with? Is it likely to be set one? And if it is, will this affect your dividend payout in any way? That's the first question. The second question is on your commercial property exposure in the U.S. and China in particular. I know you can't talk about your customers, but in particular with the SVBs because there may be some stresses there. So just wondered if you could talk about your LTVs in this commercial property exposure outside of Singapore? And finally, do you bank and this is not a negative question. Has there been any competition from the new digital banks if you could outline what you see from them with your DigiBank? Thanks.

Piyush Gupta

Sok Hui, you want to take the 81?

Chng Soul Hui

So Goola just to reaffirm what we said and guided previously, so our 81 we have about 2.4 billion. So we do not need to sort of refinance when it comes up. So meaning that our Tier-1 ratio is actually quite strong under Basel IV regime, we expect it to go up by about 2 percentage point and that should be sufficient to cover any 81 sort of instruments that mature. So it doesn't affect the dividend payout. Because we're talking about the buffer during the transition stage. It doesn't affect the final CET1 number that we will also be reporting. Yes, do you have any sort of further questions? Or is it clear to you?

Goola Warden

Okay. That's clear. Thanks.

Piyush Gupta

On the commercial property exposure, Goola, as you can imagine, the bulk of our commercial property exposures. 90% of it is in Singapore, and in Hong Kong, two cities comprise the bulk of the exposure. And Singapore, I'm not worried. Hong Kong on the commercial property side. Again, our clients are very high-end, the top conglomerates and the big guns. So I'm not worried about that either. The residual 10% of our commercial property book is around the world includes some exposures in the U.S., in the U.K., in China, and they're again very high-end obligors. And all our stress testing against that hasn't given us any cause to worry. By and larger on average LTVs on commercial property book are relatively low, they tend to be in the 40% to 50% range. I don't have specific data with respect to SREITs on me, but all the stress testing that we've done on the entire portfolio has covered everything including SREITs, and we're really not seeing any stress in that whole book.

Third question on the competition, frankly, I think I made this point before. That even if you look at countries like the U.K., where the digital banks have been operating for about a decade, or China, where there's some large digital banks like and et cetera. The relative impact of that on the incumbent banking system has been marginal at best. So the market share of the high street banks in the U.K. hasn't budged. And neither is the market share of the policy banks and joint stock banks in China. So even if digital banks are successful, their pickup and shift in market shares is glacial. It'll take a long, long period of time before we'll start really seeing the impact of any of that on an incumbent banking system.

In Singapore, honestly we're still not seeing any material impact a lot of people have experimented with opening accounts with many digital bank competitors. But the actual outflow of funds and money is not very large. And many some of them have started lending products more recently. Again, I think the total size of the lending universe is not very large. And so I don't expect it to have material impact from macro financial, our overall financial wealth.

Goola Warden

Okay. Can I ask just one more question on the REITs part. Some REITs have debt that is unsecured because they talk about unsecuring their portfolio. Does this debt rank [indiscernible] with the equity holders, or do you get first [indiscernible] in the unlikely scenario that something goes very wrong with those REITs.

Piyush Gupta

But generally, I don't know the specific answer, specific transactions and how they're structured. But generally speaking, unless you're a Swiss bank, the normal rule is the credit hierarchies equity ranks last.

Goola Warden

Okay. Thanks.

Edna Koh

Okay. There don't appear to be any other questions and just kind of give a few moments in case anyone has a final question they want to ask.

Edna Koh

Okay. There don't appear to be any other questions. So thank you, everyone. We've reached the end of the media briefing. The analyst briefing will start in five minutes. Thank you.

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DBS Group Holdings Ltd (DBSDF) Q1 2023 Earnings Call Transcript