Is DBS Group Holdings Worth Investing In Now?

DBS Group Holdings Ltd (DBS) is not only the largest local company listed on the Singapore Exchange, but it is also the largest Singapore and South East Asia bank by asset, amounting to $541 billion as of 30 Sept 2018. As a major financial firm injecting liquidity via corporate loans and housing loans into the monetary system, its earnings performance can be viewed as a bellwether of Singapore’s economic performance.

With that, let’s take a look at DBS key earnings figure in its latest quarterly results announcements for further clues.

Income and Net Profit

In 3Q 2018, DBS recorded a total income of $3.37 billion, a 10% increase year-on-year (YoY). This is a record high in total income. If we look at net profit, it stood at $1.41 billion, an even more impressive 72% growth over last year. This is attributed to sustained growth in loan, fee income, and net interest margin.

Source: DBS 3Q 2018 Earnings Presentation

Net Interest Income and Net Fee & Commission Income

Banks’ fundamental business involves lending out funds from depositors to individuals or corporations for various productive activities. In the process, banks earn a spread between the interest that they pay to the depositor and interest charged on loans. This is called the Net Interest Income which is a critical indicator of the bank’s financial performance.

In 3Q 2018, DBS made $2.27 billion in Net Interest Income. Its Net Interest Margin, expressed as a percentage of average interest-bearing assets (majorly loans), was 1.86%. Both measures improved yoy as 3Q 2017 Net Interest Income and Margin were $1.97 billion and 1.73% respectively.

Over seven quarters, DBS had sustained growth in its Net Interest Income and Margin. DBS seems to be able to manage its deposits and loans operation effectively to generate higher earnings consistently.

Source: DBS 3Q 2018 Earnings Presentation

Besides deposit-taking and loan activities, DBS also get substantial fees and commission revenue from other related operations such as brokerage, investment banking and wealth management. Net Fee and Commission Income rose 1% yoy to $695 million.

Loan Growth

As far as loan is concerned, DBS has not seen a substantial slow down in loan growth arising from the impact of US-China trade war. In 3Q 2018, gross loan grew 8% yoy to $345 billion.

Cost – Income Ratio

The Cost to Income Ratio measures how efficiently-run the bank is at a broad level. DBS 3Q 2018 Cost to Income ratio remained the same as 3Q 2017 at 43%, despite an increase in expenses. This suggests that expenses had been kept well in-line with income growth.

Return on Equity

In 3Q 2018, DBS Return on Equity (ROE) was 12.2%, a stark improvement from 7.1% in 3Q 2017 mainly attributed to higher Net Interest Margin and overall good set of results.

Valuation

DBS 3Q 2018 Net Asset Value was $17.56 per share. This gives DBS a Price to Book Value ratio of 1.24 based on 13 Nov market closing share price of $23.32.

Outlook

With a sizeable presence in Hong Kong and the Greater China region, there are worries that DBS earnings may be affected by the ongoing trade war between the US and China.

Fortunately, DBS management sounded positive about growth prospect as they expected moderate economic slowdown but overall conditions are still favourable for sustained business growth. CEO Piyush Gupta noted that the effect of trade war is mostly on market sentiment and not directly on the economy yet. Specifically, I share the following comments by Mr. Gupta on the decrease in China loans, extracted from results conference call transcript:

‘… the run-down in China loans was due to trade loans, which include loans backed by letters of credit from China banks. We are in the middle of our third review using a bottom-up approach on China to evaluate the impact of deleveraging, liquidity and so on. We are by and large quite comfortable. For the whole portfolio, we have identified fewer than 20 names that might have some degree of risk and we are getting our hands quite nicely around them.’

Secondly, management sees growth opportunities in wealth management and continued to invest in this area. According to the conference call transcript, 250 Relationship Managers were added during the quarter, and their productivity is expected to improve to $3 million in sales in the third year. Management also opined that wealth is still being created in Asia. Its Treasure Private Client business has been expanded to Indonesia and Taiwan recently which have seen some early success. Increased demand for estate planning services for this group of clients would provide DBS with sticky assets and long-term recurring income.

Conclusion

DBS showed good growth in its 3Q 2018 earnings. Management showed confidence in the fundamental strength of DBS business with a good chance of attaining the 13% ROE target. They also expect a mid-single digit loan growth in FY2019, and continued Net Interest Margin expansion. However, moderate deterioration in Small and Medium Enterprise assets portfolio is expected due to interest rate rise.

So, should you be investing in DBS now? For that, you can ask yourself three questions:

1. Is DBS valuation low historically, in terms of its Price to Book Value and Dividend Yield?
2. Do you think DBS growth prospect in Singapore and Asia is bright?
3. Would you buy more of DBS, the largest bank in South East Asia, if its share price falls further?

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