Summary
South East Asia's largest bank delivered another record net profit in 2021.
Potential further growth is higher interest income and a larger foot print.
From a price to net tangible value perspective the bank is no longer cheap, but so is their price to earnings.
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DBS Logo (NYSEARCA:DBS)
Investment thesis
When I initiated coverage of DBS Group (OTCPK:DBSDF) back in June of 2019, I bravely called it thebest bank in the world. It was an accolade bestowed upon them by Global Finance the year before.
In the summer of 2019, even a monkey throwing darts could pick great stocks. One of my darts landed on DBS that summer. To be fair, I had done my homework. The choice was not just an arbitrary choice. It was based on what Ben Graham meant when he was talking about making investments with a margin of safety. Fortunately, and not unexpected to me, the bank has done well even in a turbulent environment.
DBS just announced their 2021 full-year results and it was another record profit
This is also reflected in the fact that the share price in 2021 has gone up 29.5%. Although that is impressive, when we compare it to the U.S. financials ETF (XLF) it seems that either DBS has more to come, or the U.S. financials are just too expensive. Time will tell.
DBS versus XLF (Yahoo Finance)
Let us examine the results and see what could be catalysts for further growth in DBS earnings going forward, or whether it is time to take some money off the table and sell.
2021 Full Year Results
Southeast Asia's largest bank, DBS is executing well and delivering decent results. Net profit for the year rose as much as 44% to a record $6.8 billion, and their return on equity came in at 12.5%.
What is quite compelling is their EPS and with it their low price to earnings. The EPS was SGD 5.23 for the full year, and even at the present share price of SGD 36.50 it leaves us with a P/E of just 7.
In that respect, and bear in mind that is past earnings, the share is not expensive
Interest Income
We start by looking first at the net interest rate margin.
DBS - NIM development (Data DBS, graph by author)
The trend of lower net interest rate margin seems to have stabilized and we might see an uptick in line with higher Fed rates this year.
In atelevised interview with CNBC, CEO Piyush Gupta said that the bank had basically lost about $3 billion of revenue between the summer of 2019 and now because of the collapse in interest rates
He also said that for every basis point the interest goes up, DBS has an upside in their commercial book of SGD 18 million to SGD 20 million per basis point. Based on the model they have run, if the central bank raises the interest rate every quarter, then DBS's average NIM for 2022 will get close to the 1.6% level. The improvement obviously does not take effect immediately. It will take time to play out.
On a Q to Q basis net interest income increased for the second consecutive quarter in Q4 after 5 consecutive quarters of decline. It rose by 2% from the previous quarter to SGD 2.14 billion as loans grew by 1%. On a full-year basis, the net interest income actually fell 7% to SGD 8.44 billion
It is with this imminent increase in the interest rate that I am quite optimistic that even though DBS delivered a record net profit for this year, it is quite likely that this can increase the total from last year's SGD 6.8 billion to SGD 8 billion for 2022.
What might help them in achieving this higher NIM is also that their CASA growth has been $140 billion in 2021.
CASA, which stands for "current account savings account" is aimed at combining the features of savings and checking accounts to entice customers to keep their money in the bank. It pays very low or no interest on the current account and an above-average return on the savings portion.
DBS's CASA ratio has gone from a high 50% to 76% This could obviously change if many of their customers change bank in order to try to get more return on their money. But history shows that there is a high stickiness in people's relationships to their banks, so that is also unlikely to take place. In a study conducted in 2015, nearly two-thirds of big bank customers say it is too much of ahassle to switch.
Fees income
I have earlier reported that DBS, and other large banks, have been able to offset this reduction in net interest income by higher income from fees.
Their latest report confirms that trend. Fees income rose 15% in 2021, which equated to SGD 466 million to a new high of $3.52 billion as most fee activities grew by double-digit percentages. As a customer of DBS, I am well aware of this. Wealth Management fees increased 19% to a record $1.79 billion from higher sales of investment products
It was interesting to note that card fees rose 12% to SGD 715 million as combined credit and debit card spending reached record levels.
Other financial items
Nonperforming assets last year were down SGD 814 million, which was a decline of 13% from a year ago. As such general allowances of SGD 447 million were written back during the year, and as such their exposures in their portfolio are deemed to have improved.
Common Equity Tier 1 capital ratio as of 31st December 2021 stands at a very robust 14.4%
Their cost to net income ratio now stands at 45% which is the same as one of their local peers UOB Bank. A more efficient bank in that respect is Singapore's OCBC which had a lower cost to net income ratio for the first 9 months this year at 41.%.
DBS pays quarterly dividends. The dividend declared in Q4 was up 9% from last quarter from SGD 0.33 per share to SGD 0.36
If that quarterly dividend continues, DBS now yields 3.92% which is slightly lower than the 4.2% it yielded last time my article came out. It is not fantastic, but acceptable.
Last but not least, we should look at the price to net book value. I have already pointed out in my November article that the net book value, in relation to its share price, was no longer attractive. At that time the ratio was 1.52
Well, now it is even less attractive. Since the book value has not changed much but the price has continued to rise, the ratio now stands at 1.71 which makes the share price expensive, if we only look at this valuation in isolation.
Recent business development
Some of their new ventures, like the Digital Exchange, are interesting but small compared to the bank's main business interest. To remind readers, this is an exchange platform for non-fungible tokens, like bitcoin.
DBS Digital Exchange (DBS)
At the moment this service is not open to retail investors, as it is a "members-only" bourse for corporate investors, accredited individuals, and family offices. Presently, it only has around 400 members. But during the Q4 presentation, they did come out and said they are working on making itmore accessible to the general public.
During the presentation of Q3 their CEO Piyush Gupta guided that income from these new businesses would generate about SGD 350 million by the end of 2022. However, at theQ&A session with analysts held on 14th February, he said that the franchise by several new initiatives should give them about SGD 80 million to SGD 100 million of incremental income. He could have referred to different initiatives, or that it will take some more time than earlier anticipated.
More importantly, are their foray as bankers into new geographical areas. After all, Singapore is a tiny island with 5.7 million residents. If they want to grow, they have to do much of it outside our island shores.
Recent inorganic transactions for DBS over 2021 were the purchase of Lakshmi Vilas bank in India and the Shenzhen Rural Commercial Bank in China. I have reported on this in last year's articles.
They have also agreed to pay SGD 956 million for the consumer business in Taiwan from Citigroup (C) making DBS the largest foreign bank in Taiwan by assets.
These three acquisitions are expected to generate about SGD 1.2 billion to their top line and about SGD $0.5 billion to their net income this year.
Conclusion
Back to my investment thesis, it was easy to buy this solid bank at SGD 20 per share when it literarily was "on-sale", at the beginning of the pandemic.
It gets harder after the run-up in the share price. One reason is our tendency of anchoring biases. It makes no sense because the market is forward-looking, not concerned about what it was in the past. Therefore we should pay less attention to what it was and more to what it might become.
To conclude, there is a good probability that DBS will see a further increase in net interest income in 2022. Coupled with a gradual positive return on their expanded footprint in India, Taiwan and the Greater Bay Area in China, my bet is that 2022 will be another record year.
That is also most likely going to mean shareholders will get another increase in the dividend.
I make no specific projection for a targeted share price or the dividend yield, as that also depends on external factors outside the control of the bank.
All I can say is I am not selling out at this moment, and would add some more should the share price pullback.
You might ask "how low does it have to go?" To give an investor some more safety margin, I would like to see a low SGD 30 level before I nibble again.
I continue with a hold.$DBS GROUP HOLDINGS LTD(D05.SI)$
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