DBS (Development Bank of Singapore)

[karlmarx]

DBS has quite a few things going for it.

1. It is operating in a highly-regulated industry with high barriers to entry. And this industry will not go the way of dvd movie rentals.

2. The industry is open to competition, but its competitors, even though they are big name international players, frequently get into some sort of trouble in other markets or their own home market, which creates a poor impression in the minds of SG depositors. Trust is the most important to depositors. And so foreign banks in SG, because of their tendency to always get into some sort of trouble somewhere, will always have to attract depositors at a higher costs. And also take more risks, lower prices, and increase customer benefits, to acquire more customers. It is thus highly unlikely that any foreign bank, whether new or existing, will pose a threat to DBS. I will argue instead that more foreign banks actually enhances DBS' position over the long term.

3. Among the local banks, DBS stands out as the most progressive in terms of tech adoption. Compared to the other two, they are more frequently introducing new features and products. It is also often more competitive in terms of pricing than them.

So I see DBS continuing to be the market leader for the next decade. Whether p/b at 1.5x is expensive or not today depends on how fast they can grow their profits, or your own modelling of their future profits. But I think even if an investor buys at current prices, he or she is likely to be better off in 10 years time.

[Bibi]

I am not so sure if digital banks will start to erode away some of their profits. Increasingly, i hv put more $ into digital banks for their higher deposit rates. Maribank at 2.88%, FSMOne cash acct at 2%. As im retired and do not hv a regular salary to enjoy those UOBOne cash acct or OCBC 360, their normal savings accts are still giving a pathetic 0.5% p.a. Even with their higher interest acct, its capped at $100k.

[weijian]

I am not so sure if digital banks will start to erode away some of their profits. Increasingly, i hv put more $ into digital banks for their higher deposit rates. Maribank at 2.88%, FSMOne cash acct at 2%. As im retired and do not hv a regular salary to enjoy those UOBOne cash acct or OCBC 360, their normal savings accts are still giving a pathetic 0.5% p.a. Even with their higher interest acct, its capped at $100k.

Hi Bibi,

The business of banking has been around for some time. It's been around for some time because of the excellent economics that VB Karlmarx described earlier. Of course, it has also evolved beyond just "borrow short term and lend long term" with complimentary non lending businesses (advisory, brokerage, trustee services etc).

Let's look at DBS's deposit growth over the last decade (source: DBS ARs):

FY14:317bil
FY15:320bil
FY16:347bil
FY17:373bil
FY18:393bil
FY19:404bil
FY20:464bil
FY21:501bil
FY22:527bil
FY23:535bil

In essence, in the last 9 years, deposits have grown ~70%, or 7.6% CAGR. I am not sure when digital banks started their charm game to lure our cash, but it surely doesn't seem to affect DBS's annual deposit growth. Rather, deposit growth always have a secular tailwind from inflation (money printing) and wealth creation (eg. credit creation), unless we think that crypto is taking over the world OR we are going back to the gold standard.

So, my sense is that anecdotally some of us might be lured over to digital banks but it doesn't move the needle much.

[weijian]

Hi weijian,

It all boils down to valuation. I have no preference on either. Would you like to buy a family owned business like Sing Investment & Finance at 0.5x PB or a professionally run outfit like DBS at 1.5x PB?

Unfortunately, I have no answers to your questions. But being a deep value investor at heart, I would always certainly go for a cheaper stock in most (not all) circumstances.

However, I understand that some investors might prefer higher ROE businesses, and therefore they would have to pay for them accordingly in a form of higher PB valuations.

Fast forward a few months...and DBS's P/B has unpredictably expanded from ~1.5 to 1.6-1.65, while SingInvestment&Finance has predictably stayed at 0.5x P/B. Predictably, DBS has performed much better than Sing Investment&Finance - with DBS having low/mid teens ROE while Sing Investment&Finance having mid/high single digit ROEs.

But moving forward, what can each set of shareholders expect?

I thought Malaysia's 2nd biggest bank Public Bank Bhd across the straits, might have some lessons learnt for us. For a start, Public Bank had never been cheap. A comparison of DBS, Sing Investments&Finance and Public Bank P/B and TSR over the last 5 years:

DBS:
2019: 1.3 (last 3 year TSR:+96%)
2020: 1.2
2021: 1.46 (last 3 year TSR:+58%)
2022: 1.5
2023: 1.4 (last 1 year TSR:+36%)
2024YTD: 1.6

Sing Investments&Finance:
2019: 0.51 (last 5 years TSR:+35%)
2020: 0.5
2021: 0.57 (last 3 years TSR:+28%)
2022: 0.58
2023: 0.54 (last 1 year TSR:+6%)
2024YTD: 0.54

Public Bank Bhd:
2013: 3.3
2018: 2.3
2019: 1.7 (last 5 years TSR:+6%)
2020: 1.7
2021: 1.7 (last 3 years TSR:-2%)
2022:1.7
2023: 1.5 (last 1 year TSR:+2.5%)
2024YTD: 1.4

Thoughts:
(1) Sing Investments&Finance is probably going to stay predictable with returns coming from its dividends unless something unpredictable happens.
(2) Based on Public Bank Bhd, its P/B peaked at 3.3 in 2013 before "reversion to the mean" finally kicked in. As a result, after a world beating run in the prior years, last 5 year TSR was just +6%, underperforming Sing Investments&Finance's +38%.
(3) DBS has the best performance among the 3 for 1/3/5years TSR, mainly driven by an expanding P/B. So what does the future holds for DBS? Will it continue to expand its P/B? After all, Public Bank Bhd has shown that P/B can go unpredictably high. 
(4) You are underweight and Mr Market weighs you correctly. When Mr Market loves you, your weight magically increases. Till the day that Mr Market finds you to be overweight.

So where is the magic? Is this a choice between predictable returns VS predictable losses VS unpredictable returns?

[ghchua]

Hi weijian,

There is no standard answers to your questions. Ultimately, it depends on one's risk appetite and his/her investment time horizon. For those who have retired and needs passive income with lower tolerance for capital losses, Sing Investment & Finance might just be a decent choice for them. For those who has a longer runway, young and willing to take risk, DBS might be more suitable for them.

[donmihaihai]

DBS, Sing Investments & Finance & Public Bank TSR beside telling the story of valuation expansion(DBS), compression (Public Bank) and Stable (Sing Investment), it also tells the performance of each.

DBS- 5 years TSR 96%. valuation expansion - 23%. Remaining 73% earnings retained and dividends paid. Each year about 14 to 15%.
Sing Investments & Finance - 5 years TSR 35%. Valuation expansion - close to 6%. Remaining 30% earnings retained and dividends paid. Each year close to 6%
Public Bank - 5 years TSR 6%. Valuation compression - close to -18%. Earning retained and dividends paid - 24%. Each year close to 5%.

One should check on my calculation for Public Bank (I think it is not correct) but the above tell the story of who is doing better operating hence financial wise. Public Bank should be separate from DBS and Sing Investment because their operating environment, Malaysia is different from Singapore.

Valuation always plays a part but over a longer period, results matter. The longer the period, results will matter more and more. If Sing Investment valuation expand by the same as DBS which is about 23%, TSR for 5 years is just 53%.

While the company might look stable, in a long run, if one keep losing out to competitors, say Sing Investment and DBS in direct competition, what do you think the future might look like for Sing Investment?

This is not an analysis of these 3 companies, it is just flipping the numbers.

[jfc18]

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.

[jfc18]

*Comment 2 - Will DBS profit fall off cliff when rate cuts start?*

On a micro perspective, we can all agree DBS is one of best managed bank in the world. Under macro lens in a rate cut environment, market is unsure how DBS would perform. These are my thoughts.

When rate cut starts, DBS NIM will go down, hence less profit. Straightforward and no argument on this. However, there’s four upsides to mitigate impact.

First, loan book growth will start to pick up. No loan growth means no revenue growth. Profit can be cushioned when higher revenue supports lower NIM.

Second, animal spirits will roar back and non interest income will go up. A lot of AUM is sitting on FD now. Once interest rate of FD is not attractive anymore, clients will shift money to investments. People who buy Tbills will also shift more money to priority/private banking account. What would you do if your Tbills rate start to drop below 3%?

Third, higher for longer rates will inevitably pushes up NPL. Credit costs will hit bottomline. Rate cuts has opposite effect.

Lastly, banks borrow short and lend long. We have an inverted yield curve now which is unhealthy for banks. Short term funding costs is higher than what they can charge for long term loans. When rate cuts and yield curve steepen, banks can operate optimally.

All in, DBS still can do reasonably well in a rate cut environment. Net profit wouldn’t necessarily fall off cliff.

For share price movement, if DBS could sustain and increase dividend during rate cuts, the high yield would be too attractive for Mr Market to ignore.

Assume a probable scenario where Fed normalises and cuts 200bps to around 3% by year 2026 and DBS increases dividend ($0.24 x 2 years) to $2.64. Dividend yield would be 7.5%.

By then, SGS 10y will probably revert back to 2+% level. SORA, Tbills and FD rates would fall behind 10y as yield curve normalises and steepen. In this scenario, it is unthinkable Mr Market would still let DBS trade at 7.5% dividend yield. Historically SG banks dividend yield trade at 1.5%-2% above SG 10y. Our banks yield were around 3.5%-4.5% in past 30 years before Covid.

Henceforth, during a rate cut environment, DBS share price may not crater as many would have expected. Using a conservative SG 10y yield of 3% plus 2% premium, it is not unreasonable for market to ascribe a 5% dividend yield valuation for DBS.

Keep in mind during this time, FD and Tbills rates would be at 2+% level. Long term SGD corporate bonds at 3-4% level. Reits at 5-6% level. So DBS at 5% yield is not a number plucked out of thin air.

At 5% dividend yield, DBS share price would be $52.80, a 50% upside from current share price. With dividends, total return is 64% in two years.

At a conservative 6% dividend yield, DBS share price would be $44, a 26% upside. With dividends, total return is 40%.

I have already shared previously why I think DBS can continue to increase $0.24 dividend yearly in medium term.

The crux lies in whether DBS can continue to rake in $10bn profit in next few years. With its recent stellar 1Q result and forecast, Piyush Gupta has guided this year $10bn profit target is already in the bag.

Dbs capital neutral point is 70%-75%. This means it can potentially give out 75% earnings as dividends without impacting CET1. In other words, if dividend payout ratio is below 70%, DBS is likely to accrete more capital to its already burgeoning CET1. The current excess capital that DBS has is around $11bn, 11% of current market cap.

$10bn profit is $3.60 per share. At $2.40 dividend, payout ratio is 67%. At $2.64 dividend, payout ratio is 73%. It is clear DBS can comfortably fund $2.64 dividend even without touching its excess capital of $11bn. If DBS wants to increase ROE and return excess capital back to shareholders, the payout ratio must surpass 75%.

An astute observer would have noticed companies under Temasek stable recently have all underwent a transformation of sorts. Temasek is clearly setting a higher ROE as KPI. Notably examples are, Singtel, Starhub, SPH, Capitaland, Keppel, Sembcorp, Semb Marine, ST Engr, SATS.

Logic suggests DBS as the biggest company under Temasek, would have been tasked to shed excess fats, improve ROE and return surplus capital back to Temasek. It’s high time to invest alongside Temasek via DBS.

[jfc18]

*Comment 3 - Reply to "Nothing last forever"*

Protect the downside and the upside will take care of itself. We have established DBS has $11bn excess capital. It can comfortably pay $2.64 dividends out of earnings. In market crisis, if profit is down in a big way, DBS still has ability to sustain absolute dividend using excess capital. We could get 6-7% yield while waiting for price recovery. The high yield should somewhat support the share price in this scenario.

We also cannot rule out DBS may continue to execute and clock YoY profit growth. Dividend would increase in tandem.

Here is some data from year 2011 to 2022. I use 2011 cos banks had already recovered from GFC. So figures will not be artificially inflated from low base of 2008-2010. Again I use 2022 cos 2023 was a bumper year with high rates. Year 2011 to 2022 was a period marked with chronically low rates.

DBS 2011 NIM was 1.77% vs year 2022 NIM 1.75%. Both very similar NIM, hence the below comparison of ROE and profit growth is a fair one.

2011 ROE was 11% vs 2022 ROE 15%. Tats a structural improvement of 4% due to better business mix and higher efficiency.

Net profit from 2011 to 2022 grew from $3b to $8.2b. Tats an impressive CAGR of 9.57% for 11 years of low rates. Again, NIM was the same, so macro interest rate has nothing to do with the stellar profit growth.

Barring black swans, it’s reasonable to assume even during gradual rate cuts, DBS could sustain $10bn profit and even clock some meaningful earnings growth overtime. DBS investment thesis of growing dividends cum yield compression during normalised interest rate is intact and compelling. Share price should rerate accordingly if things play out.

There will be more economic growth in our region and Asia wealth will keep rising. Singapore is now seen as the natural choice for global rich to park some of their wealth here. Hongkong is falling out of favour due to English Common Law being chipped off slowly but surely by China. The introduction of Article 23 is just the beginning. It is making foreign investors uncomfortable. Why park your wealth in a country where laws may flip flop overnight? Is there a better choice out there? The answer is clear.

Asia will get richer and more money will flow in to Singapore. This is an irreversible mega trend. DBS as the biggest bank here, stands to benefit the most.

For perspective, when Piyush Gupta joined DBS in 2009, DBS private bank AUM is outside of top 20 in Asia pacific ex China onshore. Today it is number 3 behind UBS and HSBC. No easy feat for such a big jump. Apart from the mega trend mentioned, DBS internally must has done something right. I know I may sound biased but next time when you see a DBS branch in your neighbourhood, you are looking at a banking franchise that is probably the best in class and best in world.

[donmihaihai]

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.