Billion Dollar Club: SUPER BIG CAP

BANKING & INVESTMENT SERVICES + FINTECH & INFRASTRUCTURE + INSURANCE

DBS Group Holdings, the only Singapore-listed company to report a net profit of $10 billion, the first to reach a market capitalisation of $100 billion, and whose shares have gained some 40% year to date, has been named the overall sector winner for the Banking & Investment Services  +Fintech & Infrastructure + Insurance category. Along the way, it came out tops in all three metrics: profit growth, return to shareholders, and weighted return on equity (ROE).

For its all-round showing this year, DBS has been named Company of the Year at this year’s Billion Dollar Club (BDC).

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In addition, DBS came out tops in another industry category: super big cap companies, which recognises Singapore-listed companies within the top 10% in market capitalisation. Again, DBS swept all the honours, marking a total of nine wins.

Fixing the plumbing

The $10 billion profit generated in FY2023 was a decade in the making. Piyush Gupta, the bank’s outgoing group CEO, who took on this role in 2009, announced his retirement on Aug 7, having inherited a bank with five CEOs in 10 years.

Nonetheless, he set about “fixing the plumbing” as he described it all those years ago, to the extent that DBS’s returns over the past eclipsed those of its peers and many other sectors.

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Over the three years taken into consideration for this year’s BDC, DBS recorded a profit after tax CAGR of 28% compared with 25.1% each for Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank U11 (UOB).

In terms of shareholder returns, DBS notched up a 13.1% CAGR over the three years, compared with 9.8% for OCBC and 9.1% for UOB. Similarly, DBS recorded a CAGR of 15.2% for weighted ROE over the three-year period compared with 12% for OCBC and 11.5% for UOB.

Analysts remain upbeat on all three banks, but particularly on DBS. For instance, Rena Kwok, a credit analyst at Bloomberg Intelligence, believes all three Singapore banks are moving to lock in asset yields.

“Singapore banks could intensify efforts to grow their fixed-rate mortgages with reasonable loan-to-value ratios in the secondary market from 2H2024 onwards, given their favourable risk-returns and to bolster net interest income growth in anticipation of interest rate cuts,” says Kwok in a recent report.

“Still, we expect the banks to keep price discipline, as they aim to expand mortgage market share despite stiff competition,” she says, adding that pre-emptive asset-liability management can keep earnings momentum healthy ahead of interest rate cuts while further aided by robust non-interest income.

In a recent update, JP Morgan mentioned the possibility of DBS raising its dividends. “Our understanding of management comments is that capital management would be likely in 3Q2024 and 4Q2024. In 2Q2024, CEO Piyush Gupta mentioned he had something in mind on capital return, which he will discuss with incoming CEO Tan Su Shan,” JP Morgan says.

DBS has managed its assets and liabilities over the years such that its sensitivity to interest rates is lower and less impacted by falling interest rates. “Net interest margin sensitivity has come off to $4 million per basis point due to shifts in the current account savings account [Casa] ratio and asset mix. The bank expects the cost-to-income ratio to be in its low 40s and 15% to 17% ROE over the medium-term,” JP Morgan notes. In the meantime, its full cycle-specific provisions are likely to remain at 17 basis points to 20 basis points (bps).

Even as the local banks struggle to stabilise their net interest margins (NIMs), they continue to advance in technology.

On Oct 18, DBS announced the introduction of DBS Token Services, a new banking service suite that integrates tokenisation and smart contract-enabled capabilities with its award-winning banking services. It aims to unlock new transaction banking capabilities and operating efficiencies for its institutional clients. DBS Token Services is the commercialisation of a series of projects in partnership with the Monetary Authority of Singapore’s (MAS) Project Ubin, Project Orchid and Project Guardian.

DBS Token Services can perform instant, 24/7, real-time settlement of payments. In addition, smart contracts enable programmability for institutions to govern the use of funds according to predefined conditions, enhancing security and transparency. Using a permissioned blockchain provides DBS full control over these services, enabling the bank to harness the benefits of blockchain technology while adhering to compliance standards.

In addition, along with its local peers and MAS, DBS is moving ahead on the security front with the introduction of a secure key to guard against cyber threats in quantum computing under Project Leap.

Extending the winning streak?

If the most recent quarterly numbers are to be taken as an indication, DBS seems likely to extend its streak of wins for next year’s BDC. On Nov 7, the bank announced 3QFY2024 ended Sept 30 earnings of $3.027 billion, up 15% y-o-y and 8% q-o-q on broad-based growth. This is the first time third-quarter net profit has surpassed $3 billion. Including one-time items recorded this time last year, such as the acquisition of Citi Taiwan, net profit would have risen 17% y-o-y.

The 3QFY2024 earnings brought DBS’s 9M2024 net profit to $8.786 billion, up 11% y-o-y. This means the bank is on track to beat FY2023’s record net profit of $10.3 billion, which had crossed the $10 billion mark for the first time.

The 3QFY2024 bottom line beat consensus projections of some $2.74 billion. Following this solid beat, DBS shares rallied soundly the same day and, by the end of the week on Nov 8, closed at $42.40, a new record, giving it a market value of more than $120 billion.

To extend its track record of rewarding shareholders, DBS has proposed a third-quarter dividend of 54 cents per share, unchanged since 1QFY2024. In addition, it announced a new $3 billion share buyback programme, where shares will be purchased in the open market and cancelled. The programme marks the first time that repurchased shares are cancelled. The programme is over and above share buybacks periodically carried out for the purpose of vesting employee share plans.

“The new buyback programme we announced today is underpinned by our strong capital position and ongoing earnings generation, and it is another affirmation of our commitment to capital management. We remain well-positioned to continue delivering healthy shareholder returns,” says Gupta.