The Smart Investor
    Facebook Instagram
    Monday, January 30
    Facebook Instagram LinkedIn
    The Smart Investor
    • Home
    • About
      • About Us
      • Careers
    • Smart Investing
      • Getting Started
      • Investing Strategy
      • Smart Analysis
      • Smart Reads
    • Special Free Reports!
    • As Featured on BT
    • Our Services
      • Our Services
      • Subscribe now!
    • Login
    • Cart
    The Smart Investor
    Home»Blue Chips»Is DBS Bank a Safe Stock to Own for the Long-Term?
    Blue Chips

    Is DBS Bank a Safe Stock to Own for the Long-Term?

    Royston YangBy Royston YangSeptember 2, 20205 Mins Read
    Facebook Twitter LinkedIn Email WhatsApp
    Share
    Facebook Twitter LinkedIn Email WhatsApp

    The macroeconomic climate looks decidedly stormy right now. And the banks that are caught in the rain may catch a cold.

    With a wide swath of industries convulsing from the pandemic-induced lockdowns, border closures and movement control restrictions, major economies are either teetering on the brink of a recession or are already experiencing one.

    Singapore has not been spared the carnage.

    Gross domestic product (GDP) for the second quarter plunged by 13.2% in the worst quarter on record.

    The year on year GDP contraction has now been revised by the Ministry of Trade and Industry to between minus 5% and minus 7%, from a range of between minus 4% to 7% before.

    As businesses face stress, these effects will trickle down to the banks who are responsible for the bulk of lending activities.

    Our local banks have been hiking their provisions higher in response to increased financial stress encountered by borrowers.

    Banks represent the pillars of an economy and are thus sensitive to economic downturns.

    We take a look at DBS Group Holdings Ltd (SGX: D05) to assess if it qualifies as being a safe stock to own through this crisis, and over the long-term.

    Adequately capitalised

    One common metric used to assess if a bank was safe from financial distress is the Common Equity Tier 1 ratio or CET-1 for short.

    CET-1 includes the core capital that a bank holds in its capital structure and compares this to its risk-weighted assets (RWA) to determine its ability to withstand financial crises.

    The Basel III Regulations, introduced in response to the Global Financial Crisis back in 2008, stipulate that banks are required to hold a CET-1 ratio of 7% as a buffer.

    For Singapore, the CET-1 regulatory minimum has been set at 9% by the Monetary Authority of Singapore (MAS).

    For DBS, its CET-1 ratio stood at 13.7% as of 30 June 2020, slightly lower than the 14.1% recorded at the end of 2019.

    This ratio is above both the Basel III and MAS requirements and shows that the bank is adequately capitalised and is in no danger of having insufficient capital buffer.

    Minimal loan book stress

    Another aspect to look at is whether DBS’ loan book is facing undue strain from a potential rash of bankruptcies and corporate collapses.

    CEO Piyush Gupta is not seeing much non-performing loan (NPL) formation at this point other than for unsecured consumer credit.

    The NPL ratio has remained stable at 1.5%, dipping slightly from the 1.6% recorded in the previous quarter.

    General provisions have been raised by 50% year on year to S$3.8 billion to guard against unforeseen credit deterioration once government support measures taper on from this quarter onwards.

    These provisions exceed MAS requirements by 24%, underscoring the bank’s conservatism as it navigates this unprecedented crisis.

    Higher fee income

    Even as net interest income tumbled in the wake of lower net interest margins, this was offset by higher non-interest income.

    Wealth management fee has rebounded strongly, going back to pre-COVID-19 levels in June and July.

    Trading also saw a strong quarter with S$500 million of trading income, when a normal quarter would see around S$225 million.

    These alternative sources of revenue help to buffer the fall in net interest income for the bank, allowing it to hold up well during tough times.

    Ability to pay out more dividends

    One sore point with investors is how DBS was called on by MAS to limit its dividend payments for prudence sake.

    As a result, the bank declared a quarterly dividend of S$0.18 per share for the second quarter, down from the S$0.33 that was declared in the first quarter.

    However, in a conference call with buy-side analysts, CEO Gupta admitted that the bank would have been able to maintain the dividend (at S$0.33) if not for the call by MAS.

    If events follow current expectations set by the bank, it can raise dividends in 2021.

    These comments show that the bank has more than sufficient capital to pay out a dividend, but is now boosting its reserves even further due to MAS’ requirement.

    This move significantly boosts DBS’ capability to weather the crisis.

    Get Smart: Resilience during crises

    The above demonstrates that DBS is a bastion of stability during this pandemic.

    Not only has the bank maintained an adequate buffer with its high CET-1 ratio, but it has also drawn up provisions to account for potential bad loans in the coming quarters.

    With its strong market position and ability to raise dividends once the crisis has abated, I conclude that the bank is a safe stock to own during these volatile times.

    With share prices battered to multi-year lows, many attractive investment opportunities have emerged. In a special FREE report, we show you 3 stocks that we think will be suitable for our portfolio. Simply click here to scoop up your FREE copy… before the next stock market rally.

    Click here to like and follow us on Facebook, here for our Instagram group and here for our Telegram group.

    Disclaimer: Royston Yang owns shares in DBS Group Holdings Ltd.

    Yahoo
    Share. Facebook Twitter LinkedIn Email WhatsApp

    Related Posts

    Merger and Acquisition

    What Makes Some Serial Acquirers So Successful

    January 30, 2023
    Data Centre (Sunlight)

    5 Key Takeaways from Mapletree Industrial Trust’s Latest Business Update

    January 30, 2023
    Screen Showing Share Prices

    Get Smart: Why You Shouldn’t Focus on Share Prices Alone

    January 29, 2023
    Facebook Instagram LinkedIn Telegram
    • Careers
    • Disclaimer & Privacy Policy
    • Subscription Terms of Service
    © 2023 The Smart Investor. All Rights Reserved. The Smart Investor, thesmartinvestor.com.sg, an investment education website managed by The Investing Hustle Pte Ltd (Company Reg No. 201933459Z) is not licensed or otherwise regulated by the Monetary Authority of Singapore, and in particular, is not licensed or regulated to carry on business in providing any financial advisory service. Accordingly, any information provided on this site is meant purely for informational and investor educational purposes and should not be relied upon as financial advice. No information is presented with the intention to induce any reader to buy, sell, or hold a particular investment product or class of investment products. Rather, the information is presented for the purpose and intentions of educating readers on matters relating to financial literacy and investor education. Accordingly, any statement of opinion on this site is wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader. The Smart Investor does not recommend any particular course of action in relation to any investment product or class of investment products. Readers are encouraged to exercise their own judgment and have regard to their own personal needs and circumstances before making any investment decision, and not rely on any statement of opinion that may be found on this site.

    Type above and press Enter to search. Press Esc to cancel.