Is DBS a Potential Disaster or an Investment Opportunity?

20161205_01

Hi Investors

Summary

  • Swiber saga and its impact on DBS
  • Strong financials despite economic headwinds
  • Rising interest rates
  • Rising demand of Fintech
  • Possible weak financials in 2nd half
  • Accelerating digital innovation
  • Growing regional business expansion

1. DBS Group Holdings Ltd (D05.SI)

20161205_02

Last Closed Price: $15.22
52 Week Low: $13.01

20161205_03

Source: Yahoo Finance (Sep 28, 2016)

2. What Business DBS Group Holdings Ltd (D05.SI) Is In

The Development Bank of Singapore(DBS) is the leading financial services bank in Asia and currently the largest bank in South East Asia.

Primary business focus:

  • Corporate/Investment Banking
  • Consumer Banking
  • Equity and Debt Fund Raising
  • Wealth Management

3. What Happened to DBS Group Holdings Ltd (D05.SI) Recently?
Swiber Saga

Swiber Holdings is an offshore construction firm which placed itself under judicial management in July. DBS was affected as it is Swiber’s biggest lender, with $721M worth of exposures. $403M was used to finance 2 projects, $197M was used to repay bond investors and $121M was used for secured term loans.

Thankfully, the bank had already set aside $400M of allowances for its exposures to Swiber. DBS withdrew $250M from its own reserves, while it recorded $150M as loan loss provisions.

DBS would be able to recover $400M once the 2 projects are completed. DBS also expects to recover its loans from tangible assets such as property and vessels from Swiber.

4. Financial Highlights

20161205_04

Source: DBS Annual Report

Net fee income rose significantly from 8% 1 year ago and 9% from Q1 to a new high of $628M, due to the investment banking department.

Other non-interest income rose 22% from 1 year ago to $458M due to gains from trading and investment securities.

Total income increased 8% to a new high of $2.92B and profit before allowances rose 10% to $1.63B. The impact of higher total income and profit was offset by the net allowance charge for Swiber of $150M. This led to a fall of net profit by 6% to $1.05B.

4.1 Key Statistics

20161205_05

Source: Shareinv

PE ratio of 8.7, compared to the industry’s average of 10.8 indicates that DBS could potentially be value for money.

20161205_06

With a Dividend Yield of 3.9, DBS is one of the highest dividend bank stocks in Singapore, ranked 2nd to OCBC’s Dividend Yield of 4.2.

20161205_07

Source: DBS Annual Report

Net interest margin grew to 1.87% due to a higher Singapore Interbank Offer Rate (SIBOR). The bank’s capital adequacy ratio increased to 14.4% despite the Swiber Saga.

5. Industry Overview

5.1 Market Trends

Increasing Interest Rate

The Federal Reserve has been increasing interest rates since September 2015.

The SIBOR is closely linked to the Federal Fund’s Rate in the U.S. The banking sector makes the main bulk of their revenue from the difference in interest rates that they charge borrowers and the rates they pay to depositors, also known as Net Interest Margin(NIM). Thus when the Federal Fund’s Rate rises, NIM in banks will rise too.

Rising Demand over Fintechs

The demand for Financial Technology (Fintech) is growing in the financial services sector. Companies who leverage on the power of technology and smart phones will be able to secure their positions in the market. It can also help extend their reach to new and existing customers anywhere and anytime.

5.2 Key Risks

DBS has lent $7B to firms in the oil sector other than Swiber. Of that total, $2.7B was loaned to 90 companies and 1 third of that portfolio has weaknesses as these companies are linked to Swiber which may affect financials 2nd half of the year.

6. Conclusion

The share price has been declining since November last year. This was largely due to the uncertainty of the impact that rising interest rates would have on the bank. Futhermore, the Swiber saga from July to September dampened the stock price a little.

However, I believe DBS still has room to grow despite being a large cap company due to the following reasons:

– Accelerating digital innovation

  • DBS is the first bank to offer SMEs and retail customers the option of opening their accounts online.
  • DBS is also the first bank in Hong Kong to launch a fintech accelerator programme.
  • DBS created the mobile wallet ‘DBS Paylah!’ which enabled customers to ease payment transactions.
  • DBS had also included thumbprint technology for user verification for mobile phones.
  • DBS had launched a credit card app that allows customers to track their personal finances via mobile phones.

– Growing Regional Business Expansion

  • The Hong Kong franchise had achieved strong growth for the past year, which demonstrated its strength despite facing challenging conditions and volatile markets.
  • DBS also intends to continue expansion in Hong Kong, China, India and Indonesia. Their main focus is to leverage on digital innovation and fintech to grow their market share.

My stand is to Hold on DBS. Although I’m confident DBS will be bullish in the future, my take is to keep an eye on its 2nd half financials before taking a Long position.

If you want to learn more about how to find More Singapore Undervalue Stocks to invest, click on the picture below to join our Free Value Investing Masterclass.

cta

Geraint Liu
Research Analyst, Mind Kinesis Value Investing Academy

Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.

 

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