DBS Group Holdings Ltd (“DBS”) provides financial products and services in Singapore, Hong Kong, rest of Greater China, South and Southeast Asia, and internationally. It operates through Consumer Banking/Wealth Management, Institutional Banking, Treasury Markets, and Others segments.
DBS was founded in 1968 and is headquartered in Singapore.
Financial highlights
DBS have announced their 1H2020 results on 6 August 2020. Based on the announcement, they have earnings per share of SGD1.86 (1H2019: SGD2.52) for the first half of 2020 and a net book value per share of SGD19.71 (1H2019: SGD18.53) as at 30 June 2020.
The earnings per share have decreased which is not surprising given the continued suppression of interest rates and the global economic downturn. However, despite the poor economic performance around the world for 1H2020, DBS have been able to maintain their financial position and generate a profit.
Albeit, this may be due to the government stimulus given around the world to affected businesses in order to soften the impact of Covid-19. The customers who borrow from DBS, while may be experiencing tighter cashflows, have not necessarily defaulted on their borrowings yet. This is evidenced that while non-performing assets rose 10% from the previous half year to $6.35 billion, the Non-Performing Loan (“NPL”) rate was unchanged from the previous half year at 1.5%.
It was worth noting that their net interest margin have decreased to 1.6% (1H2019: 1.91%). This is based on one quarter of interest rates cut as a response to Covid-19. Net interest rate margins are not expected to change overnight. Instead it will be a lengthy process as usually only loans that are due will then be refinanced at a lower rate, which will then be reflected at the net interest rate margin. It may take a few quarters before all the existing loans are refinanced at the new suppressed interest rates.
Dividend yield
As announced on 29 July 2020, the recent Monetary Authority of Singapore (“MAS”) put in place a restriction to cap the next 1 year of bank dividends at 60% of the dividend distribution in the previous year.
Website: MAS calls on local banks to cap FY20 dividends at 60% of previous year’s
For DBS, given that they were distributing dividends of SGD0.33 per share quarterly, this translates to a distribution of SGD1.32 per share on an annual basis. With the MAS imposed restrictions, forward expected dividend will be SGD0.72 over the next 4 quarters. At the closing price of SGD21.05 as at 9 October 2020, this translates to a yield of 3.4%.
The results from 1H2020 is more than sufficient to sustain the dividend of SGD0.72 per share as imposed by the MAS. It is unlikely for there to be further dividend cut based on their current financial position.
This dividend is also sustainable given that is it well above the capital requirements imposed by the MAS. It is however heavily suppressed and if the yield is expected to remain at 3.4% longer than the one year MAS have restricted, it will be unattractive.
Key things to note
Low interest rates
DBS, like all other banks, rely on interest rates and taking advantage of interest spreads, where they provide loans with higher interest rates to customers while paying interest expense on lower interest rates to lenders who placed deposits with the bank.
With heavily suppressed interest rates forecasted for the next few years, this would significantly reduce the interest rate spreads that DBS can take capitalize on. This is expected to directly impact their profit for the next few years as a significant portion comes from interest income and interest expenses.
Website: Fed pledges to keep interest rates near zero for years
Digital banks
Digital banks are coming soon with licenses being awarded across the globe. These are in direct competition with DBS over market share, and they are better positioned given that they can be capital light. This will potentially reduce DBS earnings.
It is not difficult for customers to shift funds or refinance existing loans with different banks. Existing customers may in fact be willing given the recent drop in interest rates across the board.
Digital lending platform
The MAS is spearheading efforts to make open Application Programming Interface (“API”) available. This facilitates data portability in the interim and may allow for easier comparability and a higher level of competitiveness in the banking industry.
Combined with the potential entrants of new digital banks, the expectation is a further decrease in interest rate spread as competition intensifies. In light of the recession we are currently facing, it can be expected that borrowers will actively try to reduce their costs, which includes financing costs due to borrowings from banks. This is unfavorable as it may result in loss of attractiveness and market share of DBS.
Website: Open banking APIs a bigger threat to Singapore banks than digital entrants: DBS Research
National duty
DBS being one of Singapore’s key local banks may have to give out loans to ailing businesses to ensure they have sufficient working capital. This kind of action may be one that a rationale businessmen will not take, as you are lending out money to businesses that you are already aware may have issues repaying the loan. As such, these loans may be immediately classified as “Non-Performing Loan” as soon as it is disbursed.
In view of this, DBS may be compelled to take actions that will adversely affect their profits and statement of financial position. While no such actions have taken place yet, we will need to keep in mind on such a possibility.
Website: Singapore firms in aviation, construction struggle to get loans amid credit tightening
Summary
It is my believe that as a bank, DBS relies heavily on the economic performance, which is constantly supported by governments around the world with stimulus packages.
Given the macro-economic factors, I am still expecting some headwinds resulting in potential decline in share prices. The dividend yield, while now at a stable rate, is not attractive for a share counter with high risk. Thus I believe that the current share price of SGD21.05 to be Fully Valued. The expected minimum share price support expected will be at a Price-to-book ratio of 0.9 times. Given the net book value per share of SGD19.71, translates to a better entry price of SGD17.74 per share.
Nonetheless, this is a good stock that 2 to 3 years later, will likely to be able to sustain their growth once the recession recovers. We will keep an eye out for further updates on its financial position.
