With the Straits Times Index (SGX: ^STI) hitting a 17-year high recently, many blue-chip stocks have also achieved similar highs.
One of these stocks is DBS Group (SGX: D05).
Singapore’s largest bank saw its share price hit an all-time high of S$39.70 recently, giving the lender a market capitalisation of nearly S$113 billion at its peak.
Since then, shares of DBS have fallen to S$38.83 but are still 28.4% higher than they were at the beginning of this year.
Can the bank stage a share price recovery and see its share price go on to break new highs? Let’s find out.
A sparkling set of earnings
For starters, DBS reported an impressive set of results for the first half of 2024 (1H 2024).
Net interest income improved by 6% year on year to S$7.4 billion as higher interest rates boosted the lender’s net interest margin.
Fee and commission income climbed 25% year on year to S$2.1 billion, led by an increase in card spending and higher fees for wealth management.
Total income rose 11% year on year to S$11 billion, with profit before allowances posting a similar 11% year-on-year rise to S$4.3 billion.
Net profit hit a new record of S$5.7 billion for 1H 2024 and was up 10% year on year.
In line with the strong results, DBS upped its quarterly dividend by 27% year on year to S$0.54.
Its annualised dividend of S$2.16 means the bank’s shares offer a forward dividend yield of 5.6%.
Reducing net interest income sensitivity
CEO Piyush Gupta painted a sanguine outlook for 2024 by pointing out that the bank has built in resilience for its net interest income.
In terms of sensitivity, net interest income is poised to fall by just S$4 million for every 0.01 percentage point rise in the Federal Funds rate.
Back in 2021, this fall would have been between S$18 million to S$20 million.
This reduced sensitivity showcases how DBS has diversified its income streams to become less reliant on net interest income.
This should be good news for investors as the US Federal Reserve recently initiated its first rate cut of 0.5 percentage points since 2020, reducing the Federal Funds rate to a range of between 4.75% to 5%.
There may be additional cuts in 2025 with officials pencilling in more reductions in a bid to boost the US economy.
The reduced sensitivity comes at a good time as the interest rate cycle looks about to head downwards.
Overall, he believes that 2024 should see net profit grow in the mid-to-high single-digit level year on year.
Bright prospects for fee income
Non-interest income, which comprises fee income from wealth management, credit card spending, and the dishing out of loans, also faces bright prospects.
Gupta believes that non-interest income can grow in the mid-to-high teens year on year for 2024, barring a further deterioration in the economic outlook.
DBS is looking to double fees from its wealth management division by 2027, in line with the shifting of assets by affluent investors over to Asia.
It can be a very lucrative business serving the ultra-rich, with DBS’s fees from serving this segment doubling to S$2 billion in 2023 compared with 2015.
With more wealth individuals set to park their money in Singapore due to the country’s low tax rate and business-friendly policies, the bank should see its assets under management (AUM) rise further.
The AUM of DBS clients hit S$396 billion in June 2024 and is projected to exceed S$500 billion by 2027.
After DBS’s acquisition of Citigroup’s (NYSE: C) Taiwan retail business, its credit card business there is seeing good traction, which should bring in higher fees in future years.
A technology-driven bank
Euromoney named DBS the “World’s Best Digital Bank” while The Banker accorded DBS the world’s “Most Innovative in Digital Banking”.
Hence, it is no surprise that DBS has around 2,500 data scientists, analysts and engineers on its payroll last year.
This number is double the number of bankers that the lender had and is the result of the bank building up its own talent pool to support its data and technology initiatives.
DBS also deploys more than 800 artificial intelligence (AI) models across 350 use cases, according to Gupta, with the economic impact of these models expected to exceed S$1 billion by 2025.
The extensive use of AI and machine learning will enable DBS to become more efficient, thus reducing its cost-to-income ratio.
This use of technology will also allow bankers to serve clients better, aided by insights generated from DBS’s technological algorithms and processes.
Sourcing for insurance partners
Meanwhile, DBS is not resting on its laurels when it comes to regional expansion.
The bank is contemplating insurance partnerships in India and Taiwan to expand its services in these two countries.
There is news that DBS is working with Goldman Sachs (NYSE: GS) on potential bancassurance agreements for these markets, giving DBS potentially exclusive rights to sell its products in bank branches there.
This transaction, which is still preliminary, may involve several hundred million dollars but may or may not proceed depending on how discussions proceed.
Get Smart: Loaded with excess capital
DBS looks well-prepared for a lower interest rate environment as it reduces its net interest income sensitivity.
The bank is also exploring ways to increase its insurance reach and is aiming to double its fee income by 2027.
With strong capital buffers built in, the group has excess capital to the tune of S$2 per share that can be used to increase the pace of returns to shareholders.
Investors should prepare for more good days even as the bank transitions to a new era with Gupta set to step down as CEO during the bank’s next annual general meeting in March 2025.
He will be replaced by CEO-designate Tan Su Shan who has 35 years of experience in consumer banking, wealth management, and institutional banking.
The best gift a responsible parent can give their child is a secure, comfortable financial future. And we found that dividend investing is one of the easiest and effortless methods to do it. Our latest FREE report reveals how you can do it, plus the 3 SGX stocks you can buy today to start future-proofing your child’s financial future. Click HERE to grab a copy of the guide.
Disclosure: Royston Yang owns shares of DBS Group.
