DBS Group Holdings’ Treasury & Markets (TM) contributed around 24% to group income in FY2021 ended December 2021. According to Andrew Ng, group head, treasury & markets, DBS, the division clocked some $3.2 billion in income including sales and trading. Of this, 55% was from sales and 45% from trading.
DBS’ annual report points out that TM’s trading income rose 5% to $1.51 billion, double the level three to four years ago, from higher contributions in a range of activities including equities and credit trading. Meanwhile, TM customer income grew 13% to $1.71 billion. This includes treasury income from both consumer banking and institutional banking.
A bank’s treasury division manufactures a wide range of financial products which are offered to a wide range of customers — right from the largest corporate down to a retail investor. DBS’ TM undertakes trading, as well as the manufacture of products for both itself and customers, such as structuring and sales in foreign exchange (FX), interest rates, money market, credit, equity, commodities, bonds, derivatives and securities.
DBS is a key player in regional markets, including as a market maker and having the ability to originate and distribute a wide range of products. These products cut across sales, trading, fixed income origination, structured finance and securitisation origination, including DBS’ digital business and strategy.
“Asian markets are not as deep as the US market, so we need warehousing capability. We stress to [our customers], why choose DBS? It is because we are a regional bank with the ability to warehouse large chunks of trades for customers and help them solve some of their problems,” Ng says.
Diversified products and customers
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“I joined DBS in 2000 when the dealing room and the markets business was the traditional type of markets business, comprising FX, interest rates, a little bit of FX options, and money markets. These were traditional products,” Ng remembers.
In over 20 years — much of it under Ng — DBS has built derivative capabilities including credit derivatives, equity derivatives, and a large structuring and quant team. “This [team] helps build models so that we can get connected to customers to give them better pricing,” Ng adds. More recently, two new asset classes of carbon trading and a small crypto trading desk were added.
TM manufactures both liability products and assets for the bank. With rising interest rates and currency volatility, corporates will, of course, hedge both interest rates and FX. On the asset side, the low-interest rate environment has driven innovation for new products for customers such as insurance companies, asset managers, private banking customers and retail customers.
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“Corporates ask us to help them issue bonds. I think our debt capital market business is number one in Singapore for many years; and in Asia ex-Japan, we are in the top 10,” Ng points out. “People need assets. We manufacture and provide these products to customers, be it structured, equity-related products, credit products or FX. We have a full range of products,” Ng says.
Total recall
The focus on customer products is a recent advent. It was not always like this. Ng recalls working under Frank Wong, who was DBS’ COO during Jackson Tai’s stint as group CEO in the first half of the 2000s. “In those days when Frank Wong came in, his mandate was to build a more international dealing room for DBS and grow the franchise on financial markets,” he reminisces.
As Ng tells it, the system was somewhat antiquated and TM had to revamp the “front office” system. “Our credit policy, risk appetite and client acquisition were very conservative. The easiest thing was to grow your trading income. As long as we knew the right market, risk control and framework, we made a lot of money on trading.”
Indeed, DBS was seen as a more volatile investment in those days because its value-at-risk levels were higher than the other banks’. There were years in the early 2000s when DBS’ trading income boosted earnings noticeably.
“In the old days, investors didn’t look at ROE (return on equity). That is why for the first six to seven years, we were mainly a trading shop. As long as you make the right market call, and use your balance sheet, you will raise your trading profile. In 2000, the [TM] income was less than $200 million. By 2006-2007, we were at $800 million, of which 70% to 80% was from trading,” Ng continues.
In the second half of the 2000s, DBS went through turbulent times with three changes of group CEO within three years, following the departure of Jackson Tai just ahead of the global financial crisis (GFC), and the demise of Richard Stanley during the GFC.
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Piyush Gupta joined DBS in 2009 as the GFC was fading. He de-risked DBS’ balance sheet and earnings profile. In recent years, DBS has enjoyed a measure of stability and growth, with earnings more than tripling. In 2009, DBS’ net profit was around $2 billion. Compare that with the $6.8 billion the bank recorded in FY2021.
When Gupta came in, he suggested TM crosssell its products such as FX and hedging, and get more fee income. “He picked up the low-hanging fruit and the whole bank’s business jumped. The corporate banking and consumer banking customers, and TM — we are doing more cross-selling,” Ng points out.
In 2014, DBS acquired the private banking business of Société Générale. The growth in customers led to the demand for more investment products — all boosting TM’s cross-selling. “We did a few [bolt-on] acquisitions and our consumer and private banking businesses got much bigger,” Ng says.
That meant TM could manufacture more products. After raising the cross-sell ratio, TM started scaling. “If you want to scale a business, you need to automate, then transform your infrastructure and get your distribution to your internal customers, for example, in private banking, consumer and corporate banking; and external customers such as asset managers and financial institutions,” Ng says.
Digitalisation boosts TM volume
Gupta’s early efforts to digitalise the bank helped boost its TM customer sales. Relationship managers (RMs) in both consumer banking and private banking were able to use an internal system built in-house by DBS, Digimarkets, to price and book trades.
“In the old days, they needed 12 to 15 minutes to close a trade. With Digimarkets, RMs can close a trade in two minutes, we can scale the volume, and place our FX API into Ideal for the corporate side,” Ng says. DBS Ideal is a digital banking app for SMEs and corporates.
Digitalisation ensures that pricing on FX, interest rates and derivatives is faster and sharper. DBS’ FX volume has grown from $400 billion in 2017 to $1 trillion in 2021. Similarly, equity derivative volumes have grown by around six times.
“All these changes in the way we built in distribution and other engines helped to scale the business and translated into earnings. We got a bunch of quants to get the algorithm to manage transactions and square our positions more efficiently,” Ng says.
When DBS booked US$1 million of transactions in 2018, it made US$13 without the help of algorithms. Since then, margins on FX have compressed. However, in 2021, with the help of the algorithms, DBS was able to make a fee of US$17 on US$1 million of transactions.
“Although the margin for FX is getting less and less, we managed to raise our margin by US$4, and we grew our volume from $400 million to $1 trillion. With the AI Digirates engine, we can price our deal in a much faster and more efficient way,” Ng indicates.
The banking group is focused on returns to shareholders and monitors metrics such as ROE and cost-to-income ratios (CIR). DBS’ ROE of 13.3% in 1HFY2021 was higher than those of US and European banks, while its CIR was a lot lower (43.8% versus 50% for banks in other developed markets).
Steady growth
Ng is looking for “steady CAGR growth” of around 10% to 15% annually for its customer income, which translates to $2 billion. (This is based on 15% growth from FY2021’s $1.71 billion.) At some point, Ng is looking at $4 billion in TM income. “That is possible,” he muses.
“I hope we can add a few more asset classes, such as carbon trading, and we have invested in a distressed debt fund which is ultra-conservative. The manager has screened 150 deals and identified less than 10 deals,” he reveals. And, even though a crypto winter is in force, DBS can expand its digital assets portfolio.
Among them is the digital infrastructure that enables the automatic issuance of bonds on a blockchain where smart contracts are generated. DBS is also looking to tokenise and fractionalise bonds and other assets.
In terms of customer sales and trading, Ng reckons that sales can be at best 65% of TM’s total income. “I don’t believe we will ever go lower [for trading income] because you need some warehousing, and I don’t think you can’t take market risk. We need trading and warehousing capability to create the best products.”
In the meantime, with the US Federal Reserve’s hawkish stance and the sterling’s flash crash, analysts remain positive on DBS as calm in a storm. In a note to clients on Sept 26, CLSA says that few sectors are net beneficiaries of rising rates. Selective banks are.
“We expect a 100-bps Fed rate rise to lift DBS’ pre-impairment profit by $1.8 billion to $2 billion, over a 12- to 15-month asset book repricing cycle. We expect net interest margins to hit four- to five-year highs by FY2024 and ROEs to hit decade highs,” CLSA says, adding that at most credit costs would rise to 20-30 bps
