DBS: Best Bank In The World

About: DBS Group Holdings Ltd (DBSDY)
by: Tudor Invest Holdings

Profits are growing at a steady clip.

The bank is a leader in using the digital economy to its advantage.

Quarterly dividend commenced this year.

Investment thesis

The headline says that DBS (OTCPK:DBSDY) is the best bank in the world. That is a tall order. However, those words are not made up by me, or some clever chap in the bank's marketing department. It is a claim made by others. More on this later. In this article, I aim to inform investors of why I believe this bank can be a good investment. For the sake of records, I do have to disclose that Tudor Investment is one of the bank's many customers.


It is one of the largest banks in South East Asia with a presence in 18 markets. It is headquartered in Singapore; with its main listing on the Singapore Stock Exchange, DBS (D.05.SI) is the largest constituent of the Singapore Straits Times Index.

Source: Sginvestors.io

It was established by the Government of Singapore in July 1968 under the name of The Development Bank of Singapore Limited. Its largest and controlling shareholder is Temasek Holdings, which is one of two large sovereign wealth funds controlled by the Government of Singapore.

DBSDY has a growing presence in the three key Asian areas of growth which it defines as Greater China, Southeast Asia, and South Asia, being India.

In 2018 there was no shortage of accolades showered over the bank. It was recognized for its leadership globally by being named “Bank of the Year – Global” by The Banker and “Best Bank in the World” by Global Finance. It is recognized for being at the forefront of leveraging technology to shape the future of banking and was also named “World’s Best Digital Bank” by Euromoney.

The bank is as safe as a bank can be. It has credit ratings from Standard & Poor and Moody as "AA- and Aa1," which are among the highest in the world. It has been awarded as the “Safest Bank in Asia” by Global Finance for 10 consecutive years from 2009 to 2018.

Financial highlights – 2018 Full Year

Note: All figures given in this article are in Singapore Dollar. Presently 1 USD = 1.36 SGD.

In 2018, its 26,000 employees made SGD 5.63 billion profit, which equals SGD 216,538 per employee. Overall gross loans grew 6%, or SGD 21 billion, to SGD 350 billion. Net Interest Margin rose ten basis points to 1.85%.

Return on equity came in at 12.1% which is near the record of 12.7% in 2007, when interest rates were twice the level of today and capital requirements were less stringent. According to an article in the Straits Times on DBS, the management believes 13% ROE in the future should be achievable.

Its Common Equity Tier 1 capital adequacy ratio was stable from a year ago at 13.9%.

1st Quarter 2019 – showing further improvement

If we look at Net Profit after taxes for 1st Quarter 2019, it showed an increase of 9% from the same period last year, and an even larger increase of 25% if compared to the 4th quarter of 2018.

Other measures such as NIM and NPL are also improving, as can be seen from the highlights below.

Source: DBS Bank 1st Quarter 2019 results

Another positive event that took place was its decision to start to pay quarterly dividend instead of semi-annually, in order to provide shareholders with a more regular income stream. Accordingly, for the 1st quarter of 2019 the board declared an interim tax exempt dividend of 30 Singapore cents for each ordinary share. Based on the present share price, this delivers a yield of 4.9%.

Impact of Trade War

Everywhere you turn these days, the escalating cold war between the U.S. and China is the number one concern for many investors. The dispute that started as a result of America wanting a more balanced trade and fair treatment by China has now escalated to include matters of national security and non-trade-related issues. Huawei was the first to get hit, and I believe this action was so big that it left China with no alternative but to retaliate. China hit back by targeting FedEx Corporation (FDX) and Ford Motor Co. (F). It’s hard to say who will be next and when this "tit for tat" trend will reverse.

DBSDY does some business in China and Hong Kong and wants to grow it further. In Hong Kong, earnings have reached SGD 1.36 billion. In the Rest of Greater China, earnings have quadrupled to SGD 275 million.

With regard to the effect of the trade war in the real economy in China the bank's CEO Piyush Gupta commented on page 18 of DBS’s 2018 Annual Report as follows:

I tend to think the effect on the real economy from trade tariffs, while important, is not as severe for China as many commentators suggest. First, the proportion of net trade to GDP has been shrinking; within this, the US accounts for only about 19% of China’s exports in 2017

This also resonates with the results from the 1st quarter 2019, which so far show no signs of weakness from its operation in China and Hong Kong in comparison with the same quarter from the previous year.

Source: DBS Bank 1st Quarter 2019 results

The bank is in China and Hong Kong for the long run. I am as bullish as the bank is on further economic growth in China and Hong Kong regardless of the present climate between the two largest economies in the world. DBSDY may only be a niche player in that market as there is stiff competition from the Chinese banks and HSBC. Nevertheless, as it has proven, it will be a growing and not a shrinking pie for DBSDY.

Corporate Social Responsibility

This is an area which is becoming more and more important, especially for the largest institutional investors like Sovereign Wealth Funds. Many companies fill pages after pages with all kinds of wonderful programs they have, but you can be left with the feeling that a lot of it is done just as a public relation exercise.

Not so for DBSDY. It is clearly of the opinion that if you are going to talk the talk, you've also got to walk the walk.

Last year, the bank sourced more than 40% of the electricity consumption of its Singapore operations from renewable resources, and has set a goal of powering its entire Singapore operations with renewable energy by 2030. The company also nurtured 110 social enterprises through DBS Foundation’s capacity building programs.

In terms of gender diversification, it is good to see that in its operation in Singapore, women account for 60% of its overall workforce and as much as 40% of its senior management. It also makes up 30% of its group management committee.

Potential risks

As with all banks, a deteriorating business environment and a worsening economy, and particularly a hazardous lending practice, is what causes banks to get into trouble.

According to an article in Singapore Business Review dated June 7, 2019, Moody’s has recently pointed out that Singapore banks' bad loan ratio may hit 1.7% by 2020. It is primarily delinquencies from SMEs and non-financial firms which is to blame for this. The NPL ratio for loans to SMEs is much higher than that of the total loan portfolio. Data from last year showed an increasing trend with NPL going from 2.8% in 2016 to 4.6% in 2017 and rising to 5.1% in June 2018. Data for this year is not yet available, but worth monitoring.

In the article, Moody's explained that SMEs are particularly vulnerable to Singapore's economic slowdown, and these loans made up about 10% of loans at the three largest banks. The rate of new problem loan formation has started to rise modestly since reaching multiyear lows in 2018, with the increase driven by SMEs and commodity-related corporates.

An NPL of 1.7% is in itself manageable for the banks in Singapore. However, the ripple effect on the economy could be more of a problem as SMEs, defined by UOB Bank (OTCPK:UOVEF, OTCPK:UOVEY) as companies with annual turnover of less than S$100 million, or employing less than 200 workers, are important to Singapore's economy, contributing 48% of its GDP, employing about 65% of its workforce and constituting 99% of all its enterprises. Therefore, I would like to monitor this development going forward.

In terms of household debt, it is property mortgages that form 75% of household debt in Singapore. The government here takes a very proactive approach with the goal of trying to maintain a stable property price environment. It does this through the release of land to affect supply and demand, and also through its Monetary Authority of Singapore’s intervention in how much banks are able to lend on each property, and through discouraging speculative purchases by adjusting the Stamp Duty buyers have to pay upon purchase of properties.

All this is done to cool the property market if it sees price increases which are not in line with economic fundamentals. It is also to ensure that banks have a safe margin, in case of a downturn in the economy.

In July of 2018, the Monetary Authority of Singapore raised the Additional Buyer’s Stamp Duty, discouraging speculation, and more importantly for the banks, it tightened the LTV limits by 5% points for all private housing loans granted by financial institutions. That meant for a buyer's first housing loan, the new LTV limit went from 80% to 75%. If it was the buyer's second housing loan, the LTV went from 50% to 45%. For a third housing loan, it went from 40% to 20%. Therefore, there is presently limited risk of a bank crisis in Singapore caused by residential mortgage defaults. This is also Moody’s conclusion as it sees NPL ratio staying low as the strong labor market and macroprudential measures limit credit growth in this segment at about 1% as regulatory restrictions on the origination of riskier mortgages help banks maintain strong asset quality. It also went on to say that Singapore’s banks' exposure to overseas bad loan ratios was stable or declined in 2018.


As I stated earlier in the article, I believe this bank is as safe as it gets. It is also very well run with a good record of treating all stakeholders fairly, including its shareholders. I will leave it for others to decide if it is the best bank in the world. However, as an investor that is not important. Very good is good enough for me.

At the current price level, the bank trades at a P/E of 11.5 and a P/BV of 1.38. The dividend yield is 4.9%. Based on this I would say it is fair value. If we compare this to an American bank with a similar market capitalization, we can look at The Bank of New York Mellon Corp. (BK). Both have market capitalization of around $42 to 45 billion, and their P/E is around 11 with P/B just above 1. Where they differ greatly is their dividend yield which is only 1.43% for BK, but 4.9% for DBSDY.

Source: Seeking Alpha

In terms of a price target, this is so dependent upon what time frame we are looking at. As we all know, it is often external factors which will determine the short-term pricing of all stocks. We might see a continuation of its downward trend. I do believe the average price target of SGD29.43 as given by the analyst community in Singapore is achievable in view of the improved results. This target price is highlighted on the top of this article in the graph showing the weighting DBS has in the Straits Times Index.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DBSDY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.