SINGAPORE (Jan 17): DBS Group Holdings is likely to face an increasing number of challenges this year, but none of them should involve the new digital banks. Globally low interest rates may pressure the net interest margins of banks in general and a full trade deal between the US and China is far from a certainty. Whatever the case, supply chains have been upended, and Asean could be a beneficiary.
Meanwhile, the unrest in Hong Kong could still pose problems for DBS even though the bank has weathered the storm so far, says CLSA. For the first nine months of FY2019, DBS Hong Kong’s net profit rose 5.4% y-o-y, while DBS group’s net profit rose 13.3% y-o-y. DBS views Hong Kong as a conduit to China’s Greater Bay Area. At any rate, Hong Kong has a knack of bouncing back.
Mainly, though, perennially low interest rates could pressure net interest margins for DBS and global banks in general. Still DBS remains in a plum position despite low interest rates because its funding cost is the lowest among the banks.
“DBS has the strongest deposit franchise among the three local banks. Its CASA (current account savings account) ratio as of Sept 30, 2019, is 57.8%, higher than 47.1% for Oversea-Chinese Banking Corp and 43.8% for United Overseas Bank. DBS has an overwhelming competitive advantage with CASA ratio at 86.7% for Singapore dollar-denominated deposits (market share of 53% for Singapore dollar denominated savings accounts). Its cost of deposits was the lowest in the sector at 1.03% in 3QFY2019, compared to OCBC at 1.64% and UOB at 1.65%,” notes Jonathan Koh, an analyst at UOB Kay Hian.
Wealth management continues to be a sweet spot for DBS. As at Sept 30, 2019, DBS’s wealth management AUM stood at $241 billion, up 9% y-o-y. DBS CEO Piyush Gupta said during the bank’s third quarter results briefing that it continued to attract money in the ultra-high net worth and mid-tier segments, with net new money from across the region.
Indonesia could be another bright spot for DBS. On Jan 9, DBS hosted General (Ret.) Luhut Binsar Pandjaitan, Coordinating Minister for Maritime Affairs & Investment of Indonesia. During a media briefing with the Minister, Gupta articulated that DBS had significantly scaled up in Indonesia following the acquisition of Australia and New Zealand Bank’s retail and wealth business, completed in Feb 2018. The transaction enhanced the bank’s affluent base, and gave it a sizeable credit card and unsecured lending franchise.
Last year, DBS launched digibank in a third market, Hong Kong, having launched digibank in Indonesia in 2017, and India in 2016.
“With Indonesia’s large digitally-savvy young population, digibank, our mobile-only bank, is doing well. Since launch in August 2017, we have acquired about 600,000 customers, and continue to enhance the offering. As an example, we launched a digital lending product last year, which has been well received,” Gupta said.
One area that could be a source of loan growth is infrastructure financing in Indonesia where project financing would be needed for the move of the capital from Jakarta to Borneo. ”We’ve finalised research on [moving the capital to Borneo]. Construction begins end of this year and we can move the capital by end 2023 or early 2024,” General Pandjaitan said. “Moving the capital requires huge infrastructure spend and financing has to be [with] public private partnerships.”
Koh of UOB Kay Hian suggests accumulating DBS at $21.80 to $24 as he believes DBS could raise dividends from $1.20 per share to $1.32 per share in a “best-case” scenario, giving a yield of 5.5%.
