SINGAPORE (June 25): Maybank Kim Eng’s Thilan Wickramasinghe has maintained his “buy” call on DBS on grounds of its effective management of environmental, social and governance (ESG) risks. The analyst has indicated a twelve-month target price of $22.10 with a 5% upside.
“DBS displays no exceptional risks not typical for a large, regional bank for ESG. In our view, it has a regionally above-average track record of disclosure in terms of adhering to ESG standards (rated AA by MSCI). This is complemented by an overlay of a strong balance sheet (AA rated) and proactive regulatory oversight by MAS,” says Wickramasinghe.
Among the risks faced by ASEAN’s largest bank are contagion risks from clients due to the nature of its business of lending & investments as well as internal governance risks,” says Wickramasinghe. While the analyst remarks that such risks are par for the course for a large Southeast Asian bank, he praises the Singapore bank for leading the region in establishing detailed and transparent risk management frameworks and policies to combat such risks.
With a large regional footprint including 54% of its loans operating outside of Singapore, DBS faces significant governance risks especially in the area of fair dealing across product categories like wealth management and insurance. Grappling with the risk of money laundering and its obligation to protect data privacy and cyber security, the group has encountered no material controversies under these risk categories despite the size of DBS’s cyber platforms, in part due to its risk management policies conforming to global standards.
Admittedly, DBS was fined by MAS in 2016 for due diligence and money laundering lapses associated with Malaysia’s 1MDB scandal. The regulators explained, however, that the cause of these lapses lay not so much with the bank’s material controls, but rather individual employees failing to discharge their duties effectively.
Beyond regulatory risk management, DBS has taken a stronger stance on its environmental and social footprint as well. In an unusually progressive move for a regional bank, it has committed not to fund new coal mining and energy-related segments. Additionally, 40% of incremental loan funding in 2019 has been channelled towards sustainability-linked segments. The bank has begun raising US$500million (S$695.8 million) green bond funding to provide ring-fenced investments to sustainable segments and incorporated ESG scoring on wealth management products to advise clients.
In terms of day-to-day operations, DBS has been doubling down on sustainable workplace practices. Nearly all of its new suppliers have signed on to the firm’s sustainable sourcing principles while all of its Singapore branches are BCA Green Mark certified, with around two-thirds of them certified as Gold or above. 14% of its energy consumption stems from renewable sources.
The bank has also sought to improve social inclusion both in its workplace and product range. Female employees constitute 52% of its workforce and it practices a Board level diversity policy, in addition to passing a whistleblowing program to escalate employee concerns. The firm is working to expand financial inclusion by introducing services like instant approval digital loans in Indonesia and appointing elderly digital ambassadors to cater to vulnerable groups like the elderly, low income and migrant workers who may face challenges accessing financial services.
DBS’s deep balance sheet liquidity and strong capital levels create ample opportunities to gain market share in the medium term. A strong CET1 ratio of 13.9% and USD LD ratio of 77% will enable it to gain new business as corporates seek to improve liquidity and diversify funding risks amid supply chain rerouting from China to Southeast Asia and the Covid-19 recession. Its strong progressive dividend policy offers medium-term dividend certainty for value investors.
As of 6 pm, DBS is trading down 0.41 points at $20.69 with a price-to-earnings (P/E) ratio of 9.09. It offers a solid forward dividend yield of 5.83%.
