DBSDY - Boring But Reliable DBS Group

2023-12-19 07:44:09 ET

Summary

• Singapore’s banking stalwart continues to deliver.
• But normalized growth rates are settling in.
• The rich dividend payer comes at a premium to book.

As far as DBS Group Holdings (DBSDY) goes, there are no surprises. Earnings are growing, margins are high, dividends are good. Perhaps the only noteworthy moment is the settling of lower growth rates. I mentioned it in an article about UOB (UOVEF), the third among Singapore's Big Three banks, in 1Q this year. The latest 3Q results confirm that prognosis, mostly.

3Q update

To be sure, it was still a strong showing. In fact, revenue rose to a record quarterly value of S$5.2bn and pushed net profit 18% up year-on-year to S$2.6bn. Quarter-on-quarter, however, the growth trend was more modest. Revenue added 3%, and net profit (excluding one-off items) declined 2%. Net interest margin, which had buoyed the recent outperformance, stayed flat, at 2.82% for the principal Commercial business (2Q: 2.81%).

Singapore's Big Three: 3Q growth metrics

Source: DBS , Dr Wealth

2Q results were definitely more solid (with an exception of OCBC's bottom line), so the signs of normalization are obvious.

Net interest income aside, the bank's loan book is the other factor of interest. And on that front, things have been slowing down too, but even more dramatically. Excluding the S$10bn portfolio of newly consolidated Citi Taiwan, trade loans declined by 3% q-o-q, corporate loans by 1% and consumer loans by another 1%, bringing gross loans to S$416bn. Peer results are similar, with OCBC's loans (S$298bn) adding 1% and UOB's (S$318bn) staying unchanged.

Expenses in absolute terms have been going up consistently (though not reflected in the cost-to-income ratio thanks to growing top line figures) - a hefty 12% in the last quarter to S$2.04bn, attributed to "higher staff costs and consolidation of Citi Taiwan".

The addition of Citi Taiwan also raised nonperforming assets by 6% (NPL ratio: 1.2%). These, of course, are amply covered, at 125%. As is the case with all banks in Singapore, prudential funding and capital requirements are more than adequately met.

2024 outlook

The trends seen here will persist into the new year. This concerns, first and foremost, slowing top line growth - which the management estimates to settle at "mid-single-digits" compared to high teens in this last quarter and twice as much before that. At the same time, expenses will keep growing, at a higher pace than revenue, at "high-single-digits".

While net interest income may stay elevated for a while longer, growth in non-interest income will remain lackluster. On the asset side, the deceleration in loan growth is likely to become more pronounced. And all of that against the background of macroeconomic headwinds.

Other things mentioned by the management included their commitment to digital improvements after a series of pretty embarrassing (for the leading bank in advanced Singapore, that is) disruptions to their digital services throughout 2023.

Singapore

With a 1.1% rise in GDP in the third quarter, the island nation enjoyed a temporary reprieve from the overall downtrend of 2023. But the forecast for the full year is a moderate 1%, down from 3.6% recorded in 2022, due to contracting manufacturing output and falling exports .

The prospects for 2024 are somewhat better, with the latest median forecast for GDP growth standing at 2.3% . Although given weak demand from developed economies, negative trends across sectors - aside from services, most notably - are expected to continue.

Stock

Listed as D05 on the Singapore Stock Exchange, DBS returned a -7.7% (-1% with dividends) over the past year, against the banking industry's 3% (9%). Its longer-term record is more impressive: 25% (45% with dividends) over the past three years versus the industry's 14% (32%).

The contribution of dividends to total returns has clearly been significant. In the last ten years, dividend yield increased from about 3% to 6% currently, albeit with some violent swings in-between.

Being the largest bank, DBS normally trades at a slight premium to peers. At 1.4x on a price-to-book basis, it is more expensive than both OCBC and UOB that trade at 1.1x.

Conclusion

DBS is an easy pick for income investors looking for companies that will keep delivering reliably. Note, however, that high growth rates of the recent past will not stay; the tapering has already started. And sustained economic pressure may force the bank to eventually cut the dividends.

Personally, competitors OCBC and UOB appear more dynamic with a more forward-looking strategy. They are just as dependable performance wise (efficient OCBC, in particular), but cheaper. DBS, meanwhile, might have rested on its laurels a little too long.

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