Long-term investors have been served well by having at least one bank in their portfolios. All three Singapore banks have proved their mettle through the Global Financial Crisis, the European debt crisis, Covid-19 and most recently, the Chinese property crisis.
As we move into 2023, banks are likely to start phasing in Basel IV in July with banks being given five years for total implementation. And DBS Group Holdings is a major beneficiary.
As DBS group CEO Piyush Gupta had said during the 3QFY2022 ended September 2022 results briefing on Nov 3, 2022, “Our target CET-1 range has always been guided at 12.5%– 13.5%. Another thing to factor in is the impact of Basel IV, which is very material. Our CET-1 jumps to 16% because of it. Between now and the end of the decade, we are looking at capital cushion buffers of two to three percentage points, not decimals of a per cent.”
Moreover, DBS is prepared to raise its dividends. As Gupta explained on Nov 3, “We have three choices to return capital — increasing the regular dividend, paying a special dividend or doing a share buyback. Everything is on the table. While a share buyback at current valuations might not be the most attractive path, I hasten to add that the issue is not something the board has reviewed.” DBS’s P/ NAV is around 1.66x. Dividend payouts are subject to board approval and this usually occurs with the full-year results. DBS announces its FY2022 results on February 13.
In the past 12 years, DBS has improved on its asset liability management, wealth management income, and creating a digital bank as far back as 2016. Elsewhere, with treasury income increasingly from customer flows, there was lower volatility in overall income.
In terms of markets, DBS is focused on India, China and Southeast Asia. Its Asean footprint is limited to Singapore and Indonesia. However, DBS has in recent years made “bolt-on” acquisitions in wealth management and commercial banking.
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In November 2020, DBS acquired Lakshmi Vilas Bank in India, and in April 2021, it took a 13% stake in Shenzhen Rural Commercial Bank. In January 2022, DBS announced it is acquiring the consumer business of Citibank Taiwan. The acquisition completes this year.
“On M&A, we are still absorbing the transactions done in recent years. Lakshmi Vilas Bank is integrating well but we still have yet to fully extract value from it. The Citi Taiwan integration will only be completed in August [2023]. So we already have a handful to deal with. Our long-standing approach has been to avoid large-scale M&A and the deals we have done are in the vicinity of $1 billion. If we do get further opportunities, they are not going to drain capital,” says Gupta.
Meanwhile, its loan book of $429.16 billion and assets of $766 billion remain relatively sound. As Gupta tells it, the portfolio has been stress-tested with an oil price of $200 per barrel, and a 30% decline in property prices.
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“We have a watchlist that is 4%–5% of our portfolio we pay close attention to. When I said our large corporate book is quite pristine, it is because we are not seeing companies under interest-cover stress. In addition to rates, we have also stressed-tested using a $200 price and currency weakness. Only a handful of names come up. On commercial property, our loan-to-values are low. Our stress tests show that with up to a 30% decline in prices in both Singapore and Hong Kong, where a large part of our collateral is, we would still be in the money,” adds Gupta.
In 3QFY2022, DBS paid out $926 million in dividends (or 36 cents per share) out of a net profit of $2.236 billion. DBS’s net profit for FY2022 is estimated to top $7.9 billion for a growth of 14.9% y-o-y according to a poll of analysts by Bloomberg. This is forecast to increase at a faster pace of 21.1% y-o-y to $9.788 billion in 2023 but rise at a slower pace of 5.4% to $10.315 billion in 2024. Based on these estimates, DBS has the potential to continue raising its dividends.
For the next 12 months, DBS could turn out to be a defensive play in the face of challenges, and a growth stock if economic growth rebounds near the end of 2023.
