The outperformance of DBS Group Holdings since group CEO Piyush Gupta took over in 2009 is not due to chance.
When Gupta first joined DBS, he had something of an uphill task. He had inherited a bank that had seen five different CEOs in 10 years and one which had — in the view of most investors — overpaid for Dao Heng Bank in Hong Kong in 2001. Some market watchers reckon that the $10 billion price tag is one of the reasons DBS has not made any transformational acquisitions — similar to Oversea-Chinese Banking Corp’s acquisition of Wing Hang Bank in Hong Kong — since then.
At DBS’s Investor Day on May 22, Gupta said: “When I first joined the company, I asked: What could create a differentiated investor proposition?”
He adds: “We would not be just an Asean or North Asian bank. We would do North Asia, Southeast Asia and the Indian sub-continent combined. While we build a network of connectivity, we would go deep into those countries, not inch-deep, mile-wide.”
DBS’s markets are China, India, Indonesia and Taiwan. “If we could do this, it would give us a big advantage. We would do the connectivity flows, anchored in Singapore and Hong Kong. Our presence in these four countries will allow us to gain diversification,” he continues.
Despite the challenges, during the past 10 years, DBS’s net profit CAGR of 8.8% is the highest among the local banks. To achieve this, Gupta focused on organic growth and “bolt-on” acquisitions such as ANZ’s retail and wealth management businesses in Singapore, Indonesia, China and Taiwan in 2016. In 2014, DBS acquired Societe Generale’s private banking business in Asia. In 2020, DBS acquired Lakshmi Vilas Bank in India. In the next year, it acquired a 13% stake in Shenzhen Rural Commercial Bank for $1.079 billion, or 1.01x book value.
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As Gupta sees it, emerging market and developed market cycles are countercyclical. “The emerging market cycles are not aligned. We provide diversified access to Asia, technology play and hopefully [we can] leverage on a sustainability agenda,” Gupta says.
As an example, in China, in the first part of the 2010–2020 decade, banks did very well. However, in recent years, “the banks got hammered”, according to Gupta.
Since 2014, DBS has focused on technology as part of the banking process. Gupta once remarked what kept him awake at night was China’s Ant Group, the fintech giant founded by Jack Ma, rather than competition from other banks. President Xi Jinping may have taken care of Gupta’s sleepless nights with curbs on Ant, now a shadow of its former, pre-2016 self.
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On June 10, Citi issued a “sell” call on DBS for three key reasons. Citi calculates that 1QFY2023 average interest earnings assets or AIEA (or NII÷NIM) were lower at $617 billion than the consensus estimate of $653 billion. “Using consensus NIM of 2.08%, we estimate that every $10 billion downside in AIEA lowers NII by 2% of profit after tax,” the Citi report says.
Secondly, Citi believes that loan growth in Greater China could remain soft with onshore lending rates staying low. In addition, The Wall Street Journal reports that China faces deflation, the opposite problem developed markets face, with both PPI and CPI showing y-o-y declines. Says WSJ: “Economists say the absence of inflationary pressure means China could experience a spell of deflation — a widespread fall in prices — if the economy doesn’t pick up soon.”
The governor of the People’s Bank of China has said he expects consumer-price inflation to rise in the year’s second half and exceed 1% in December.
Third, DBS’s superior ROE to peers could narrow on higher taxes, provisions, and fair value through other comprehensive income (FVCI) loss reversal, affecting balance sheet items such as shareholders’ equity. Hence, if earnings continue to accrete to shareholders’ funds while there is a writeback in DBS’s securities book, that would boost shareholders’ funds and cause ROE to moderate. However, NAV would rise and because DBS is often valued on a price/NAV basis, its share price may receive a boost.
Despite Citi’s bearishness, DBS’s net profit may attain the $10 billion mark this year. In February, Gupta said the banking group had a “shot at getting to $10 billion” in net profit for its FY2023 ended December, which would be announced next February.
That $10 billion target was again repeated by group CFO Chng Sok Hui at DBS’s Investor Day in May, who said: “In 2023, we gave guidance for the full year for profit to hit $10 billion and for ROE to reach 17%.”
Chng also outlined DBS’s growth drivers, which could help reach its target. These include a superior deposit franchise which has extended to foreign currencies, its credit risk management which has ensured its credit costs are lower than peers, and the continued growth of the high ROE, capital-light businesses of wealth management, global transaction services (GTS) and treasury and markets (T&M) income.
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One of DBS’s focuses is to become a technology company. A few years ago, at a Christmas party, Gupta joked that the acronym DBS is increasingly likely to stand for “Digital Bank of Singapore”. But while DBS had deepened its tech prowess, digibank had been hit with three outages in the past two years.
On May 5, the Monetary Authority of Singapore (MAS) imposed an additional capital requirement on DBS “following the widespread unavailability of DBS Bank’s digital banking services on March 29 and a subsequent disruption to its digital banking and ATM services on May 5”.
Together, with the additional capital requirement imposed on DBS in February 2022 for a previous disruption to digital services, this translates to approximately $1.6 billion in total additional regulatory capital — which is the main negative surrounding DBS’s share price performance.
