SINGAPORE &ndash Outgoing DBS Bank chief executive officer Piyush Gupta expects the US to remain as a global growth engine but warns of three potential headwinds that could lead to a market correction.

 

Mr Gupta, who joined the Singapore bank in 2009 from Citibank, will be passing the reins to Ms Tan Su Shan, the group&rsquo s head of institutional banking, at DBS&rsquo annual general meeting on March 28.

 

During his tenure, DBS began its digital transformation, a journey that propelled the bank&rsquo s earnings, and eventually its market value beyond $120 billion &ndash a feat unrivalled here.

 

Mr Gupta delivered his last opening address on Jan 13 at the DBS Private Bank Market Outlook for the first quarter of 2025.

 

He said: &ldquo The biggest source of strength in the global economy comes from the US. Retail sales have been holding up... Inflation is high, but payroll data is high and jobs are being created.&rdquo

 

He reckoned the base case of assuming a soft landing is still pretty much intact. A soft landing would mean the US Federal Reserve has accomplished the difficult task of taming inflation without triggering a recession.

 

While the market now assumes no more interest rate cuts by the Fed, Mr Gupta expects to see &ldquo a couple of rate cuts at least&rdquo .  

 

Uncertainties related to US policy loom large. If President-elect Donald Trump&rsquo s administration implements targeted tariffs and modest fiscal easing, the overall impact could provide a tailwind for US growth. If so, it makes sense for investors to buy US equities even though they are expensive, as earnings are coming through, Mr Gupta added.

 

But the tail risks cannot be ignored, he said.

 

One of these is potential instability in the financial markets.  

 

In the US, consumer loan delinquencies have crept up.

 

Total household debt in the US increased by US$147 billion (S$201 billion) from the second quarter of 2024 to a record high of US$17.94 trillion the following quarter, data from the Federal Reserve Bank of New York showed. Mortgages made up 70 per cent of the US$17.94 trillion. Credit card and auto loan delinquency rates have also increased sharply.

 

&ldquo The free float and availability of US dollars is beginning to shrink,&rdquo Mr Gupta said. 

 

A stronger US dollar means headwinds for most emerging markets as they face a rising cost of external debt paid in the greenback.

 

&ldquo Put all these together &ndash delinquency in the system, high valuations, tighter liquidity, fewer dollars in the system... it is not impossible to see some market corrections,&rdquo Mr Gupta said.

 

He added that this instability in the financial markets could spill over into the broader economy, fuelling uncertainty and insecurity.

 

There are also risks associated with more extreme trade policies hitting emerging markets and export-oriented Asia. Slower growth in these regions will impact the US, Mr Gupta said.

 

The US government debt to gross domestic product (GDP), at around 120 per cent, is creating anxiety, he added. The cost of debt could hurt markets. 

 

&ldquo So I think the US should do generally well, but I still see a lot of choppiness, a lot of volatility,&rdquo Mr Gupta said. 

 

Investors may want to be a little defensive and diversify their portfolio beyond the US and into emerging markets and gold.

 

Asia outlook

 

On China, Mr Gupta noted that there had been many policy measures to boost growth, but the mainland faces a fundamental challenge &ndash the lack of market confidence.

 

&ldquo As a consequence, they are finding it very hard to turn the ship,&rdquo he said.

 

While some sectors in China could see an improvement, others like its electric vehicle market, where there are more than 100 electric vehicle manufacturers, could see some value destruction. 

 

Growth in India is expected to slow to 6 per cent to 6.5 per cent in the fiscal year ending in March 2025, down from 8.2 per cent growth in the previous year. 

 

The outlook for South-east Asia is mixed, with Singapore witnessing broad-based growth. The Ministry of Trade and Industry has forecast that the country&rsquo s real GDP growth will range from 1 per cent to 3 per cent in 2025, down from 4 per cent in 2024.

 

Malaysia is likely to remain strong, with analysts projecting a GDP growth of at least 5 per cent, driven by foreign investments. 

 

Indonesia&rsquo s outlook is uncertain, though long-term growth is projected at around 5 per cent, Mr Gupta said. 

 

DBS chief investment officer Hou Wey Fook said the bank&rsquo s flagship barbell strategy returned 15.6 per cent for the year as at Dec 4, 2024. 

 

The bank continues to rate US equities and technology stocks as &ldquo overweight&rdquo on the back of Trump&rsquo s pro-business stance and the growing adoption of artificial intelligence. 

 

Mr Hou also advocates &ldquo overweight&rdquo on fixed income as it provides downside protection should trade tensions escalate.

 

He suggested holding some assets such as gold and hedge funds to enhance a portfolio&rsquo s overall resilience.

CGS International analysts Andrea Choong and Lim Siew Khee have kept their &ldquo hold&rdquo call on DBS Group Holdings with an unchanged target price of $43 ahead of the bank&rsquo s earnings for the 4QFY2024 ended Dec 31, 2024. The bank will release its results for the 4QFY2024 and FY2024 on the morning of Feb 10.

 

&ldquo We expect DBS to post 4QFY2024 net profit of $2.7 billion,&rdquo write Choong and Lim in their Jan 13 report. The analysts&rsquo estimate represents a 11% q-o-q drop but an increase of 13% on a y-o-y basis.

 

They add that overall loan growth is likely to have stayed soft due to &ldquo sluggish&rdquo corporate demand although this is slightly offset by the stronger US dollar (USD) in the 4QFY2024. The analysts expect DBS&rsquo s loans to grow by 0.5% q-o-q. In tandem, they believe that DBS&rsquo s loan growth for the FY2024 likely came in within the bank&rsquo s estimates within the low-single digit range.

 

In the 4QFY2024, Choong and Lim have estimated DBS&rsquo s net interest margin (NIM) to be at 2.13%, 2 basis points (bps) higher q-o-q. Their estimate is based on the bank&rsquo s exit NIM of 2.15% in the 3QFY2024, above its quarterly NIM of 2.11%, sustaining into October 2024. &ldquo [This is] due to less accounting asymmetry on how interest income is booked.&rdquo

 

In addition, DBS has a fixed-rate asset book of some $190 billion, of which $50 billion is said to be maturing in FY2025. This may attract some yield pick-up in the quarters to come, the analysts note.

 

On wealth, even though the bank displayed strong wealth management momentum in its previous quarters, the analysts expect seasonal factors to slow earnings in the segment.

 

In line with this, the analysts are expecting DBS&rsquo s cost-to-income ratio (CIR) to increase to 42% in the 4QFY2024, but remain within the bank&rsquo s guidance of 40% for the full year.

 

&ldquo We believe credit costs were benign at 11 bps in 4QFY2024,&rdquo they write.

 

All three banks are likely to have seen a seasonally softer set of earnings for the 4QFY2024 due to lower business activity and higher leisure travel and year-end festivities, the analysts note.

 

&ldquo Broadly, we think NIM stayed rather stable in 4QFY2024 despite the 50 bps US Fed Funds rate cut in November [and] December 2024 as its effects may be more noticeable only in 1QFY2025 - 2QFY2025 when it takes effect in both asset yields and funding costs,&rdquo they write.

 

All three Singapore banks also said they will declare final dividends in the 4QFY2024. With this, Choong and Lim expect DBS to raise its ordinary dividend per share (DPS) to 60 cents from 4QFY2024 onwards. &ldquo DBS estimates $6 billion in transitory excess capital (due to Basel III reforms) $2 billion will be used redeem its additional tier-1 capital securities, with the rest available for shareholder return.&rdquo

 

To this end, Choong and Lim say they remain neutral on DBS as they believe investors have &ldquo priced in the positive outlook for NIM and wealth management in FY2025.&rdquo

 

Their target price of $43 represents a downside of 2.6% to DBS&rsquo s share price of $44.13 as at Jan 10 and around 2.05% lower than the bank&rsquo s closing share price of $43.90 as at Jan 15.

 

DBS : D05 -0.14% on Friday (Jan 10) announced that it will redeem all US$1 billion of its 3.3 per cent perpetual capital securities on Feb 27, the first call date of the securities.

 

The securities will be subsequently cancelled and delisted from the Singapore Exchange. The Monetary Authority of Singapore has approved the securities&rsquo redemption, said DBS.

 

The securities will be redeemed at the optional redemption amount of US$1,000 per calculation amount with the distribution accrued.

 

The securities are part of the group&rsquo s US$30 billion global medium-term note programme.

DBS Group Holdings says it will elect to and will redeem all of its outstanding US$1 billion 3.3% perpetual securities on Feb 27.

 

The perps were issued under the bank&rsquo s US$30 billion global medium term note programme on Feb 21, 2020, and was first callable in 2025. Buyers of the perps had to purchase them in denominations of US$200,000 and integral multiples of US$1,000 in excess.

 

DBS had the option of redeeming the perps on Feb 27 or on any distribution date thereafter. If the securities are not deemed, the distribution rate would have been reset on Feb 27 and every five years thereafter to a rate equal to the prevailing five-year US dollar treasury rate at the time plus 1.915% per annum.

 

Following the redemption, the securities will be cancelled and delisted from the Singapore Exchange Securities Trading Limited (SGX-ST).

 

The securities will be redeemed at the optional redemption amount of US$1,000 per calculation amount with the distribution accrued.

 

On Feb 27, the redemption price for the securities will become due and payable. Any distribution will cease to accrue on or after the redemption date. DBS will then pay the moneys to the holders of the securities.