DBS (Development Bank of Singapore)

[Choon]

DBS has a net interest margin of 1.89%, low compare to U.S. banks like Wells Fargo and M&T.

Any insights?

[Choon]

I notice that DBS revenue and net profit have about doubled in the eight years between 2011 and 2019.

Any insights into what drove this growth?

[¯|_(ツ)_/¯]

8 Jun 2020 NOM eAGM2020 DBS
https://links.sgx.com/FileOpen/DBSH%20-%...eID=616800

It's whopping 51 pages of reading materials.

"Moving forward, the biggest pressure on our earnings would come from interest rates. The US Fed had cut interest rates sharply by 150 basis points to near zero in March 2020, but the cut was not reflected in our 1Q2020 net interest margin (“NIM”), which remained stable, due to timing.
In addition, our NIM was determined by LIBOR, SIBOR, SOR and HIBOR. While they typically followed the US Fed rate, they had been holding up relatively well as funding markets were dislocated. However, we expected NIM pressure to be felt in due course and have an estimated impact of $500 to $600 million to net interest income in the coming year."

Stay home and stay healthy, everyone.

[donmihaihai]

I notice that DBS revenue and net profit have about doubled in the eight years between 2011 and 2019.

It is the same for all 3 local listed banks. 

Recently, there are some who think their share prices must drop to near GFC low and if that happened, then the 3 local listed banks will be trading at/ or close to 30 years low valuation. In fact, 3 local listed bank valuation were quite reasonable even before Covid-19 drop.

It is the same for most SGX listed big caps. Most are trading at/ or close to 20 to 30 years low. And this even triggered some to call STI lousy or not the place to park investor money as compare to US or China Tech. The last time this happened was during early 2000, and STI staged an almost 3X gain from SAR low to before GFC.

I don't know what will happen next, but I do know that when we come to the current valuation of local big caps, the odds is good.

[Shiyi]

Stock markets are said to look past the Covid and into the future.
But the future still looks hazy if not gloomy. Yet stock markets are experiencing V-shaped recovery.

MTI downgraded the economic growth to a whopping minus 4% to minus 8%.
For the value investor, I dont quite know how the market players do the valuation other than hope against hope.

[Choon]

When prices and valuations are low, it becomes so much easier to apply fundamental analysis and value investing tenets. One can rely on simplistic valuation measures (and being just about right) and low prices to reduce his investment risks, rather than having to be precisely correct in his forward forecasts. Yet it is also when valuations are low, that it is most psychologically and emotionally challenging to stick with one's investment beliefs.

Applying a simplistic valuation calculation on DBS from a common equity tier 1 ratio perspective, at current share price of $20, the return to shareholder could be at least 8.2% p.a. over the medium-term. My assumptions are:
- Going forward, DBS would have to return all of each year's earnings to shareholders (either dividends or share buybacks) to avoid over-building its CET1 capital;
- That's because its CET1 ratio at Dec2019 is already 14.1%, safely above its internal target of 12.5%-13.5%, and the regulatory requirement of 11.5%.
- Simplistically assuming that forward earnings would average S$4.3bn per year (average of 2011-2019) (for reference 2019 net profit was S$6.4b).
- By assuming that forward earnings would average S$4.3bn per year, I am making the implicit gamble that macro-conditions in its key markets (SG and HK+China) over the medium would be relatively supportive.  

 8.2% (on conservative earnings assumptions) for a reputable and well-capitalised bank, I think that's a good gamble. Not multi-bagger returns but surely would fit the description of a value investment?

Attached PDF sets out some calculation details.

[edragon]

8.2% (on conservative earnings assumptions) for a reputable and well-capitalised bank, I think that's a good gamble. Not multi-bagger returns but surely would fit the description of a value investment?

Attached PDF sets out some calculation details.

A gamble is still a gamble but I do hope NPL, defaults, bankruptcies, zero (or negative) interest rates, unemployment and reduced deposits will be tame (unlikely) going forward.

[corydorus]

I am still trying to figure out the impact due to digital banking 5 licenses that we can assign some earning deduction from it.

[karlmarx]

DBS and the other two local banks (and if you are adventurous, the many other regional banks) are at present, interesting investment candidates because of their lower valuations.

You have a good name stock, which is expected to be facing very strong headwinds due to the pandemic, and is also expected to be facing a possibly more threatening headwind due to increased (digital) competition.

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Risk-based businesses, particularly finance and insurance, are generally not valued by their p/e because their actual earnings (not based on accounting conventions) are characterized by multi-year 'cash conversion cycles.' If the bank offers you a 20-year mortgage, and you pay on time for the first 10 years, the bank will show 10 years of profit. But what happens to the bank if the property market crashed on the 11th year, you have no way of servicing the mortgage, and you decide to default on payments?

During normal, clear skies kind of circumstances, most banks will report okay 'profits.' But because they are extremely leveraged, a stormy weather coupled with too many bad risk bets (due to poor underwriting/risk policies) in the preceding years may cause the entire company to teeter. Depending on the severity of impairment this may have on the bank's capital, shareholders may be expected to put in more money (rights issue), or be diluted by new shareholders (government bailout).

===

So investors prospecting local banks right now have to deal with two questions:

Q1) What is the level of damage that the pandemic may have on the bank's capital? Is it more than their present provisions, or loss reserves?

Q2) What is the level of damage, if any, that increased competition may have on the bank's profitability?

For Q1, the investor has to figure out whether the bank has been behaving too aggressively. This may include looking at the history of the bank's lending performance during recent crises, its level of provisions and loss reserves vis a vis NPL, the credit worthiness of the customers it is presently lending to, its liquidity, and payout ratio of dividends. Basically, it is everything highlighted in the AR.

The pandemic will hit both the bank's retail and corporate clients. But since local retail and corporate clients do tend to have stronger balance sheets compared to past crises, the increase in NPL is unlikely to cause surprise.

Q2 is the more pressing concern, since it has the potential to deal long-term damage to a bank's earnings. More competition is always cause for concern for any business.

Digital banks in the form of being able to perform transactions from an internet-enabled devices, without having to do so at a physical bank branch, is already here. Accounts can be opened digitally even if you have no existing relationship with the bank. Certainly, there is still much that can be improved to make transactions even easier and cheaper. But generally the local banks are already working on the right track.

So the introduction of licenses for digital banks is nothing more than an attempt to prod the incumbents to work harder at improving efficiency. And probably also to ensure that Singapore creates the leading (digital) bank in the region, since the incumbents already have local branches in the region, which means less regulatory hurdles to overcome.

Unlike the incumbents, the digital entrants will not have a (local) track record. Since safety is the most important consideration for a depositor, and the entrant does not have a reputation which the incumbents enjoy, it will be difficult for the entrants to attract deposits if their rates are not significantly higher than the incumbents. And to build their loan book, they may have to offer cheaper lending. So incumbents may have their net interest margins squeezed if deep-pocketed entrants offer more competitive deposit and lending rates.

For retail banking, there are already 9 QFBs. So the effect of another 2 entrants is unlikely to be big, especially if they are not ambitious. But if one or both entrants have bold and aggressive plans which are sustainable, that may put a pause to the growing earnings of the incumbents. At least in the first few years of the entrants' inception.

[Wildreamz]

I have not looked closely into banks in a while. But if punting on banks in general, would a counter like ICBC (1398) price to book around 0.5-0.6, yield around 6% (32% payout ratio) be more attractive and defensive (due to size, government backing, and limited exposure to international markets, and more towards Chinese domestic markets, which has contained COVID19 relatively successfully)?

Not an expert, not vested in banks.