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.