DBS (Development Bank of Singapore)

[jfc18]

Remember DBS world beating 18% ROE? This ROE is actually dragged down severely by the excess $11bn capital. Hypothetically if DBS has returned all this $11bn excess capital to shareholders last year and with the same net profit, actual ROE would be 22.6% instead of 18%.

Less $11B also mean interest income got to be reduced as the contribution by $11B got to be removed. DBS average rate for income about 4++% mean earning reduced by around $500M pretax. Cost remain the same because liabilities remain and operating expense remain. 
Leverage increased too, $62 billion less $11 billion mean equity about $51 billion. While total assets reduced from $739Billion to 728 billion. 
After > 20 years, this is my first time to read about DBS having World beating ROE and being best bank in the world. Wouldn't be surprised when share price and results are doing well.

Hi donmihaihai,

A bank capital structure is broadly classified into Tier 1 and Tier 2. 

Under Tier 1 capital, the components are Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1).

CET1 consists mainly of common shares equity plus retained earnings and minority interests.

AT1 consists of perpetual bonds with no maturity.

Under Tier 2 capital, it consists of unsecured bullet bonds of max maturity of 5 years.

If a bank collapses, Tier 1 capital investors would be wiped out first, followed by Tier 2 investors, lastly the depositors.

A bank would have to incur cost for its capital. Eg, coupons for bonds issued. DBS does not earn interest income from its $11b excess capital. On the contrary, it needs to pay money for them. DBS bonds and perpetual bonds coupon ranges from 3% to 5+% depending on the denominated currency. However, a ball park 4% funding cost for AT1 and Tier 2 bonds is reasonable.

Henceforth, if DBS was to return all excess $11b capital, it would save $500m of funding cost annually which would boost bottomline. This $500m savings is not an one-off but is recurring in nature. For context, that would be a 5% earnings growth on a $10b profit. 

As a fellow Singaporean who uses DBS app everyday and grew up in a country where DBS and POSB branches are ubiquitous, I too did not realise we really do have a world class bank in our own backyard. I was convinced only after a deeper study two years ago.

The numbers speak for themselves. DBS 2023 ROE of 18% was 7th highest among world biggest 100 banks. Beating US, Europe and Aust leading banks of JPM, GS, HSBC, SC, BNP, NAB. It is important to take note DBS 18% ROE is achieved with a lower NIM compared to the global peers above. More amazingly, stripping off $11b excess capital to optimal CET1 of 13%, DBS true ROE would be 22% in 2023.

Banks with above 20% ROE are usually the ones in developing countries with ultra high CASA ratio and thus high NIM. For example, Indonesia big 4 banks have NIM of 4+% to 5+% in 2023. The biggest Indonesia bank is Bank Central Asia whose 2023 NIM is 5.6% and ROE 21%. For perspective, DBS ROE is not far behind and is achieved with a relatively low NIM of 2.13%.

Let's zoom out now. Actually DBS has won numerous World's Best Bank accolade this past decade. Since 2018, it has won 7 "World's Best Bank" award from Global Finance, Euromoney and The Banker. These are all reputable institutions. DBS has also won "Asia's Safest Bank" award by Global Finance for consecutive 15 years and running. There are still a slew of other awards like Best Digital Bank, Most Innovative Bank, etc. Too many to mention, really. In 2023 alone, DBS has won 39 awards. 

Again, I have vested interest. My views may be biased. YMMV.

[weijian]

@ghchua,
My questions were more rhetorical in nature than anything else, not seeking "clear" answers as you have said. We choose the poison that suits our temperament. Also, I try to create choices between "good" and "better" now, rather than "good" and "bad".

@donmihaihai,
I do not have an easily available example of a Spore bank that went to the moon and back, so I had to use Public Bank. That said, Public Bank probably has 1 of the lowest cost-to-income ratio (<35%), lowest NPL (in the realm of 0.5%) with decent low teens ROE despite having really low CASA ratios. It is truly doing shareholder service compared to many of its peers doing national service.

[weijian]

Hi karlmarx, weijian and ghchua,

I have been a fan of your postings and learnt immensely from your knowledge. Thank you guys!

I am vested in DBS and would like to share with my thoughts. Below are my three different comments to a financial blog couple of weeks ago. I will just copy and paste what I wrote. My views may be biased.

Not trying to bump up DBS price or whatever. It's market cap is above $100b. Small retail investors like us will not move the needle. Solely for sharing purpose and healthy discussion. Thank you.


*Comment 1 - On why DBS 1.65x PTB is justified*

You have missed out an important metric for banks analysis which is ROE. ROE is a function of PE and PTB.

Market prices DBS at 1.65x PTB because its ROE is 18% last year. UOB and OCBC PTB is 1.2x because their ROE is around 14%. However, all three have the same PE around 9x.

Hypothetically if DBS can achieve ROE of 25% and has a rich PTB of 2x, it is actually cheaper as PE is only 8x. PTB alone is only half of the story.

DBS has a structurally 4% ROE outperformance vs peers due to:
– higher CASA ratio.
– higher non interest income which requires less capital.
– superior tech

Question is can DBS defend 18% ROE? With interest rate coming down, probably no. But Piyush Gupta has commented many times that their modelling indicates DBS can achieve 15-17% ROE in next 3-5 years if interest rate does not plummet to zero like in the past.

If we assume middle ground 16% ROE is sustainable, market is now ascribing 1.65x PTB, which equates to PE 10x. It is not expensive for a well run bank which can stand shoulder to shoulder along global peers.

For perspective, DBS 18% ROE is 7th highest in the world’s top 100 banks. Beating even JP Morgan, Goldman, Citi, HSBC, StandChart, BNP Paribas, Deutsche, NAB and many more.

Moreover historically SG banks have the lowest NIM among the developed countries. Past 20 years average SG banks NIM is 1.7%. UK and AUS is 1.9%. US is 3.4%. To achieve world beating high ROE with low NIM, DBS must be doing something right with Piyush Gupta at the helm.

Going forward, DBS has clearly communicated post bonus issue, it will raise dividend by $0.24 p.a for the next 2-3 years at the minimum. Hence using share price of $34 post bonus issue, 2025 dividend of $2.40, yield is 7%. With 2026 dividend of $2.64%, yield is 7.8%. This is the baseline. Risk is on the upside.

Is the high dividend sustainable? Yes, because DBS business mix requires less capital now. It can comfortably give out 70% dividend payout ratio and still grow its business nicely.

More importantly, CET1 is now at 14.6%. During the tech disruption, MAS penalised DBS and increased its RWA Operational Risk Multiplier to 1.8x. When this tech penalty is eventually lifted off (OCBC tech penalty is lifted off this year), CET1 will be bumped up to 15.51%. From 15.51% to optimal CET1 target of 13%, it means DBS has $9.2bn of excess CET1 capital.

During Covid years, Dbs has also built up $2.2bn of Management Overlay which is over and above of what is required of GP. This amount is totally untouched yet.

All in, DBS may have excess capital of approx $11bn which can be returned to shareholders and still be able to run its banking operations optimally.

Remember DBS world beating 18% ROE? This ROE is actually dragged down severely by the excess $11bn capital. Hypothetically if DBS has returned all this $11bn excess capital to shareholders last year and with the same net profit, actual ROE would be 22.6% instead of 18%.

Judging DBS by 1.65x PTB alone is missing the forest for the trees. At current price, we are getting a world class bank with:

Actual ROE 22%
PE 10x
Sustainable forward dividend of above 7%

Not pricey at all.

hi jfc18,

I read this comment earlier on a local popular blog and I have to commend that this comment is actually much better than many of the posts from the blogger itself (and this is more of a compliment on your post than to say the blogger doesn't write good stuff)

There are probably tons of stuff that I have to learn from you on banks. And so here I am, poking.

Higher CASA ratio: Who determines CASA ratios? While higher CASA ratios mean one has higher NIM but it also means probably higher liquidity risk as well. The former is a very clear thing but latter is pretty abstract. A structural advantage can easily turn into a structural disadvantage one day?

Higher non interest income which requires less capital: I reckon this is probably the Holy Grail of Banking - Lend money to poor people and sell products to the rich people (or the other way around, depending on your experience). Unless you got a rogue trader or decide to become a principal yourself, else I suspect this portion of the business (agency, management) is actually pretty good. At most times, I have a soft spot for asset/capital-light businesses over those capital-heavy ones.

Superior tech: After all their service disruptions that eventually got MAS doing some enforcement, superior tech is the last thing that I would associate with DBS. Could you actually elaborate more?

P.S. did you mix up between or VBs K and D?