The outlook for banks is closely tied to the outlook for the economy. DBS Group Holdings ticks a few boxes. For one, Singapore has been one of the most successful nations to curb the spread of Covid-19. Among the three local banks, DBS has the largest exposure to Singapore. In FY2019, Singapore contributed more than 70% to its net profit of $6.39 billion. This dipped to 60% for the nine months to Sept 30 due to DBS’s conservative provisioning policy.
The other two Singapore banks have a larger regional footprint than DBS. Oversea-Chinese Banking Corp is expanding its foothold in North Asia following the acquisition of Wing Hang Bank, and United Overseas Bank is increasingly viewed as an Asean bank.
Singapore is in pole position to take off, since any economic recovery is likely to be closely tied with solving Covid-19. Of course economists remain cautious, as both developed and emerging economies grapple with second and third waves. Maybank Kim Eng expects GDP growth this year to rebound to 4.5%, near the lower end of the government’s 4–6% forecast range. Nonetheless, positive GDP growth is a reversal of the 5.8% contraction expected in 2020. Interestingly, GDP growth in 3Q2020 and 4Q2020 rebounded to 9.5% q-o-q and 2.1% q-o-q respectively.
“Domestic activity has held up well in 4Q2020, which should sustain given speed and coverage of inoculation. Hence, net interest margins (NIM) in 2022, rather than 2021, and credit costs in 2021 and 2022 are likely to drive positive revisions for banks. Mortgage, construction and trade finance are driving loan growth, while wealth management and capital markets should underpin fees,” a recent JPMorgan report points out.
Its top pick among the local banks is DBS. “The bank is well positioned to deliver balance sheet growth and revenue growth. Liquidity and capital have always been adequate at DBS. What has changed in this cycle is underwriting strength, which in our view is a game-changer. In addition, the bank’s technological prowess allows it to compete not only with banks, but also with FinTechs across revenue lines,” JPMorgan sums up.
DBS has guided that credit costs for 2020 and 2021 would likely come in cumulatively between $3 billion and $5 billion. DBS already has around $4 billion in general provisioning reserves, and this can be tapped on in the event of any special provisioning surprises. JPMorgan is factoring $4.1 billion in cumulative provisioning for the two years 2020 and 2021, in its estimates.
On Jan 25, after its FY2020 ended December, DBS was instructed by the Reserve Bank of India (RBI) to amalgamate Lakshmi Vilas Bank (LVB) with DBS Bank India (DBI). While LVB enabled DBI to scale up in South India, DBS had to inject $463 million into LVB. In addition, LVB’s absolute non-performing loans are estimated at $614 million, according to UOB Kay Hian.
Elsewhere, a Financial Times report claims that DBS is exposed to troubled Huachen Automotive Group, a China state-owned enterprise, to the tune of RMB779 million ($160 million). The Financial Times reported that Huachen is caught up in a spate of defaults and owes more than RMB33 billion to its lenders, including DBS.
On the other hand, dividend payouts could normalise in the second half of this year. In July last year, the Monetary Authority of Singapore instructed banks to prioritise supporting the economy and to pay out 60% of 2019’s dividends in 2020. DBS pays its dividends quarterly. In FY2019, it distributed $1.23 per share. In 1QFY2020, DBS maintained its FY2019 dividend payout at 33 cents per share. This was lowered to 18 cents per share in 2QFY2020 and a further 18 cents per share was distributed in 3Q2020. MAS’s recommendation on dividends is likely to be out during the second half, market watchers say. They expect dividends this year to be higher than 2020 levels, but lower than 2019’s.
On the digital front, JPMorgan remains bullish on DBS. “DBS has grown into a digital leadership position in Asean. These investments help deliver cost efficiencies and provide an edge on revenue recovery. We expect costs/assets to drop from 1.11% in FY2019 to 0.94% in FY2022,” JP Morgan says.
In FY2019, DBS reported a net profit of $6.39 billion. JPMorgan expects FY2020’s net profit to fall to $4.65 billion, before rebounding to $5.66 billion this year. Meanwhile, vaccinations have started across Asean. “Herd immunity will likely be achieved by the fourth quarter, at the earliest in Asean. Border controls may only be significantly relaxed when other major markets and neighbouring countries achieve herd immunity, which is more likely to materialise in 2022,” Maybank Kim Eng says.
Stock prices are likely to recover ahead of fundamentals, and this could very well be the case with DBS, making it a must-have in any equity portfolio.
