As the challenger banks such as Green Link Digital Bank, ANEXT, GXS Bank, MariBank and Trust Bank chase customers, loans, deposits, and elusive profits, that other digital bank, the “Digital Bank of Singapore”, better known by its acronym DBS, has made new highs. DBS Group Holdings introduced digibank, its digital bank, back in 2016.
In 2019, United Overseas Bank U11 (UOB) launched TMRW in Thailand, which has since been renamed UOB TMRW. Both digibank and UOB TMRW are Singapore’s first digital banks.
Both DBS and UOB’s share prices have been moving higher. The consistent upward movement of DBS’s share caused JP Morgan to turn cautiously positive on it for some months. At one point JP Morgan had downgraded DBS to neutral. In a report dated July 3, JP Morgan upgraded DBS to “overweight” from “neutral”.
“DBS has delivered one of the best bank turnarounds in the last decade, in our view, as technology-led changes across the franchise led to improvements in growth, efficiency and ROE. The bank’s digital strength is driving gains in market share, wealth management as well as underwriting, which has previously seen challenges at the bank,” JP Morgan says.
DBS reported a profit of $2.06 billion in FY2009, the year that current group CEO Piyush Gupta joined the bank. Singapore Telecommunications Z74 reported higher earnings in that year. In FY2023, DBS reported a net profit, including one-off expenses for the acquisition of Citi Taiwan, of $10 billion.
During a results briefing in early May, DBS’s management indicated it planned to protect that $10 billion.
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Here’s how, according to JP Morgan. The bank’s digital strength is driving gains in market share and wealth management. Continued back-book repricing is also providing a degree of resilience to net interest margins (NIM), says JP Morgan. In DBS’s 1QFY2024 ended March results briefing, Gupta provided details on the $40 billion of loans and securities to be repriced.
In 4QFY2023, the local and foreign banks started competing for mortgages which JP Morgan says was a bid to lengthen duration. That is, the maturity terms of these housing loans are likely to stretch past the Federal Reserve’s easing programme. All these factors provide stability and the opportunity for DBS to pay higher dividends.
In a screening of Asean banks, JP Morgan says capital return has become the key driver for several regional banks year-to-date. It should continue as long as asset quality holds, loan-to-risk-weighted assets (RWA) growth stays low and NIM compression remains within reason. “This is a function of economies running neither hot nor cold, with businesses and households able to withstand higher rates; with FX being the adjustment factor in a few cases. Our base case is for sustained pre-provisioning operating profit and return on assets, and low credit costs, allowing banks to return capital. On this theme, DBS screens well, hence we upgrade the stock to overweight,” JP Morgan says.
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Of course, in any cycle, asset quality remains a risk. DBS has total commercial real estate (CRE) exposure of $90 billion (21% of loans), of which $18 billion is in Hong Kong (4.3% of loans), which could see risks given broader sector weakness. Nonetheless, JP Morgan has lifted DBS’s price target to $41.
JP Morgan has a “neutral” rating for UOB. Since JP Morgan’s investment bank is the adviser for Oversea-Chinese Banking Corporation’s privatisation of Great Eastern Holdings G07 , it is not mentioned in the 90-page bank report on Asean banks.
