To The Moon

$DBS GROUP HOLDINGS LTD(D05.SI)$ Bullish Piyush Gupta, the CEO of DBS Group Holdings has received a 13.3% y-o-y pay increment to $15.38 million in FY2022. The total package includes a cash bonus of $5.8 million and a deferred remuneration of $8.0 million. Of the deferred remuneration, 17.2% will be in cash while the remainder will be paid in the form of shares.

According to DBS’s annual report published on the morning of March 9, Gupta’s total package comes after the bank’s “breakout year” in FY2022. During the year, DBS’s net profit stood at a record $8.19 billion, up 20% y-o-y. The bank’s return on equity (ROE) also significantly surpassed previous records at 15%.

“DBS’ sterling financial performance reflected the benefit of higher interest rates, the strength of a broad-based franchise and multi-year transformation efforts. In particular, the bank’s strengthened current and savings account base enabled it to enjoy higher leverage to rising interest rates than in previous years, contributing to strong total income. Diversified engines of growth also helped to mitigate the drag from lower wealth management and investment banking fee income,” reads the report.

Outlook for 2023

In DBS’s annual report, Gupta says he expects US interest rates to increase to around 5% and remain there in 2023.

“The latest core Personal Consumption Expenditures price index of more than 4% is still above the Fed’s target. At the same time, job creation in the US remains strong, with the unemployment rate of 3.4% in January 2023, the lowest since 1969,” he says in his note.

That said, the CEO notes that “several green shoots are emerging”, referring to the moderating inflationary environment, China’s reopening, as well as easing geopolitical tensions.

“With interest rates already in restrictive territory, financial markets have started to price in the end of the rate upcycle. If inflation continues to ease and a mild recession ensues in the developed economies, we will end up with a soft landing,” says Gupta.

On China’s reopening, the CEO notes that this will “provide a substantial boost to economic activity, particularly in Asia.”

“We have seen how other countries’ reopening in the past year created a resurgence in travel and tourism, which are major economic sectors. China is bigger than other countries in the region. I expect consumption to substantially increase and energies unleashed across the region in the coming year now that the short-term pain from China’s reopening appears to have passed,” he adds.

Within China itself, the CEO also noted the government’s course correction on its domestic policies that clamped down “on what it saw as excesses in key sectors”. To this end, Gupta says he does not foresee any property crisis happening after the Chinese government provided liquidity support for companies within the property sector.

“In the technology sector, the Chinese government has allowed major companies to release new games, sign up new customers and carry out new fundraising,” he adds.

Overall, Gupta notes that one of the consequences of these improvements will be return of “animal spirits to financial markets – well before their effects are felt in the real economy”.

“Since the start of the year, financial assets led by equities and bonds globally have clawed back some of the losses incurred in 2022. I believe Asian markets, having underperformed US markets over the past two years, will lead the upturn,” he writes.

“The macroeconomic and geopolitical backdrop bodes well for our operating outlook in the coming year. A sustained level of high interest rates is beneficial to our established current account savings account (CASA) deposit franchise,” he adds, referring to the bank’s latest net interest margin (NIM) which is now running at 2%, which is the highest in more than a decade.

“The higher rates, together with structural improvements from transformation initiatives, will enable us to sustain a ROE of more than 15% in the foreseeable future. At the same time, the restored confidence in financial markets will lead to a significant recovery in our wealth management fee income,” he predicts.

On whether the bank is able to sustain its 15% ROE, Gupta says this can be done as the bank’s digital transformation becomes more pervasive and if interest rates do not return to the “unusually low levels” seen during most of the past decade.

Finally, the DBS CEO isn’t ready to write off technology just yet despite the collapse of technology valuations and crypto asset prices in 2022.

The major sell-off during the year has “little bearing on technology as a continued driver of the global economy. The dot.com crash at the turn of the century testifies to that,” says Gupta.

“Between March 2000 and October 2002, the Nasdaq Composite Index fell by more than 75%. Twenty years on, more than 60% of the global population are Internet users. Social media is a cultural phenomenon. Mobile and online technology have fundamentally reshaped business models,” he adds.

The way he sees it, valuations are “not necessarily the best indicator of the underlying promise of a technology.”

“Indeed, some technologies we see today have the potential to be truly game-changing,” he adds, citing examples such as digital technology, as well as artificial intelligence (AI) and machine learning (ML). “Blockchain/ distributed ledger technology allows us to reimagine workflows, such as those pertaining to clearing and settlements. This could dramatically change backoffice operations by reducing costs and boosting overall efficiency and effectiveness. Tokenisation and digital monies will also be a part of our future.”

“Against this backdrop, our fundamental thesis is that DBS needs to be a technology leader,” says Gupta.

In his view, the collapse in valuations is helpful to the bank as “it reduces unsustainable market competition”.

“With cheap money flooding markets in recent years, a lot of tech companies had been competing irrationally. The latest correction makes for a more rational marketplace. We may also find that as tech valuations become more reasonable, there may be opportunities to enhance our capabilities,” he says.

“The financial services industry is on the cusp of being reshaped by technology, and we must continue to be at the forefront of change for the benefit of customers and society-at-large,” he adds.