DBS Group Holdings Ltd (DBS) have already provided a provision for bad debts and increase the amount of assets reclassified to non-performing assets during 1Q2020. There was also a guidance not to cut their dividends going forward, maintaining a quarterly payout of 33 cents per share.
They represented that cutting dividends or decreasing fixed deposit rates should not be done as “It isn’t time for people to be squeezed”. Yet they have been revising the fixed deposit rates downwards in April and May 2020. It is an action the CEO have say is “nonsensical” and “a bit of a red herring”. I believe this contradicts his earlier stance and they are preparing for more headwinds to come.
On the assumption that Covid-19 decides to drag for another year, their own cash flows will be affected. Not cutting dividends will be seen as doing National Service for Singapore, but it also may result in depleting their cash reserves set aside for a rainy day.
The recent Hin Leong Trading is just the beginning of many to come. While it may look like a one-off item, the fact that Hin Leong Trading has filed for bankruptcy protection means that the banks have no intention to negotiate refinancing and rather salvage what they can. There will be more in the future as banks will reconsider issuing new letters of credit given the slowdown in the economy and more Companies may face repayment issues.
Dividend yield
At the time of this writing, the share price of DBS is $19.44. With a forecast of dividend maintained at $1.32 per share annually, this translates to a yield of 6.8%. It helps mitigate potential capital losses should the share prices continue to fall.
Some positive notes
Fortitude budget 2020
On 26th May 2020, the Singapore government unveiled the S$33 billion fortitude budget. It is not a small amount by any means (in fact the budget seems to be increasing exponentially). Aside from all the monetary benefits businesses and individuals will be receiving, a key takeaway to me is that the government is actively supporting digitization of all businesses.
Going full digital will allow Companies to continue to operate while trying to minimize disruptions. This in fact is the direction I believe the government is heading. Take the opportunity to “lift” circuit breaker and try to implement digitization in case we need to lock-down again in the next few months.
I am having mixed feelings about this one. I will be lying if I tell you I know how this budget will play out to our economy, or if there are any repercussions to the individuals of society. However, it will be a good sign to help support local businesses from outright dying. From this point of view, DBS gets some indirect support from the government.
Some key points to note
Singapore’s GDP growth forecast has been cut, again
It is in my opinion that GDP will always be a good indicator for banks. In order for them to do well, you need the economy they are supporting to do well.
Banking is not like the other industries. There are notably a few industries that as long as they can resume operations, they will not be severely affected.
In these industries, it also helps if you are one of the bigger players, you can grow simply by surviving the downturn and then gaining market share as the small competitors close down.
From a shareholder point of view, you will prefer if the bank does not lend money to companies that have even a hint of financial issues. However, banks need to continue to lend out the money as part of their financial duty to stimulate the economy and ensure it does not experience a slowdown due to lack of funding. They will have to find other ways to mitigate the risks.
Small businesses accumulation
Already over 8,500 businesses have closed and more business entities are expected to follow regardless of government efforts to help save these business. The idea is simple. If you are a business owner, and you realized that your business is not going to do well due to Covid-19 for the rest of the year, there is honestly no reason to continue even if the government offers to subsidize some of your costs for a few months. Instead should consider cutting loss early and spend the time to find alternative ways to survive.
If a significant number of small companies close, banks will have to write off more assets permanently.
Website: Over 8,600 businesses ceased and filed to cease operations in April.
Limited government support
It contradicts the earlier paragraph about government support, but my idea is that the government will not continue to give support forever. Eventually some of these costs will have to be shared to the individual entities. Additional costs may result in it being unprofitable to continue running the business. The recent news about Covid-19 testing costs to be passed to construction companies is the beginning. I believe more of these measures will be implemented to other industries in due time.
Conclusion
I linked all these to DBS because banks lend money to several of these entities to start businesses or finance their operations. With more Companies facing cash-flow problems, DBS may eventually find itself having to write off more loans than previously provided. Non-performing assets are expected to increase and bad debts as well.
It was worth noting that DBS is stronger than they were in the previous recessions. They will definitely be in a good position to weather the storm. However, this storm is different from the previous ones. There is no bubble to be burst here, and it will be a slow deterioration or recovery from here out.
I am vested, but will temporary refrain from adding more.
