DBS is positioned uniquely at the intersection of both India and China to gain from growth in both countries. Facilitating capital flows out of China, continued rising footprint in India, digital asset presence, a trusted bank in Singapore which is emerging as the Swiss of Asia, DBS has more than one source of tailwind powering its upward flight.
Specifically, this paper identifies five key drivers powering DBS shares. Against the backdrop of sharp recession ahead, this paper posits a case study delivering 2.8x reward to risk ratio through a spread comprising of long DBS shares and short MSCI Singapore Index futures to gain from expected outperformance.
The DBS Story
Launched >50 years ago, DBS is the largest bank in South-East Asia and rubbing shoulders among global banks with S$743B in assets as of December 2022. Its diverse services cover consumer banking, asset management, brokerage, and digital assets. DBS' robust capital position, strong governance, and solid operational practices, with MAS as the regulator, makes it a bank with the highest credit ratings in APAC.
“Live More, Bank Less” defines the essence of the bank's strategy. DBS aspiration goes beyond being the best bank but aspires to deliver experience that's world class and on par with GANDALF firms. GANDALF stands for Google, Amazon, Netflix, Apple, LinkedIn, and Facebook. And D? DBS, of course.
A key figure in the transformation has been its CEO Piyush Gupta who has helmed its leadership since 2009 and is seen as instrumental in the bank's meteoric rise as a global banking player.
Last year, DBS delivered stunning record profits of S$8.2B driven by surging rates. 2022 was not entirely hunky dory as fees and commissions declined 12% YoY.
DBS expects 2023 to be better with a forecast of double-digit fee income growth plus rising income from cards business. While loan growth slowed with rising rates, DBS continued to gain market share across both corporate and consumer loans.
Key growth driver for DBS in 2023 and for the rest of the decade is the wealth migration from China. Singapore is a key destination for capital taking flight out of China. DBS is strongly positioned to take advantage of this as a trusted and customer-focused banking partner.
Five factors to propel DBS shares ahead:
1. Chinese Wealth Migration
Ultra rich Chinese have been emigrating with Singapore as the preferred destination. China’s crackdown on its business and entrepreneur class with a focus on “common prosperity”.
China faced capital flight of about $150B annually from its citizens migrating. Capital flight in 2023 is expected to be far higher, with some estimates suggesting it could top $100-$200B.
About 10,800 rich Chinese migrated in 2022, the highest since 2019, according to Henley & Partners. China has the world’s second-largest number of ultra-rich with more than 32,000 people holding wealth more than $50M.
DBS holds a key position to capitalize on this trend as the leading and trusted bank in Singapore. It is not just the Chinese but also the wealthy from India, Indonesia and Thailand finding Singapore as a convenient home for them and their wealth.
2. Regional Expansion via Digital First Strategy
DBS’s digitization dovetails nicely into their regional expansion as digitised infrastructure easily transcends geography.
Case in point is DBS' expansion into India. It had its presence in India since 1994. However, it was with the launch of Digibank India in 2016 that propelled its footprint in the country.
Digibank India was the first mobile-only, paperless, signatureless, and branchless bank in India. This allowed them to expand rapidly in the country while India was going through its own financial digitization following demonetization exercise in 2016. This provided DBS with a strong launchpad while keeping operational costs at bay.
DBS India has seen its deposits grow consistently since launch with a huge jump following the acquisition of Laxmi Vilas Bank (LVB). Over the past 3 years, DBS India has doubled its revenue. DBS has been profitable since launch, except for a tiny loss in 2017-18. LVB acquisition enabled DBS to expand its branch presence nearly 18x from mere 30 to >500.
3. Bold Forays into Digital Assets
In 2020, DBS launched DBS Digital Exchange (DDEx) enabling institutional and accredited investors to access digital assets.
With rising regulations for crypto firms, a fully regulated digital exchange like DDEx from a trusted bank such as DBS is a safe haven for digital asset investors.
Success of DDEx is evident in its performance in 2022 when BTC trading on the exchange increased 80% YoY. BTC’s custodied on the exchange also doubled while ETH custodied on the exchange increased 60%. DDEx also doubled its customer base to nearly 1,200 last year.
4. Deep Digitisation
CEO inspired DBS' purpose driven digital adoption agenda in 2014, with a five-year roadmap and a lofty aim of being named the best bank in the world.
DBS approached the challenge by thinking and operating like a major tech firm instead of a bank. It overhauled its internal tech, 90% of which was developed and managed in-house making it cloud-native enabling rapid scaling and easy deployment.
DBS pioneered “Digibank,” a mobile only bank that allowed it to scale rapidly and with low cost per retail customer. Digital customers have two times higher income per client compared to traditional clients with cost to income ratio of 34% relative to 54% for traditional clients.
5. Startup Mentality
Making Banking Joyful. DBS is deliberate in becoming ever more customer-centric by cleverly tailoring each customer journey to be hassle-free and enjoyable. The bank aims to become “invisible” to its customer while meeting their banking, financial, and investing needs.
In instilling a start-up culture, the leadership team continues to cultivate agility, continuous learning, customer obsession, data-driven experimentation and risk-taking across the organisation.
DBS Outperforms other Singapore Banks
Among top three Singapore Banks:
• DBS has the highest ROE at 14.95%.
• DBS operating margins of 41.5% are far higher than others.
• DBS margins are twice those of OCBC.
• DBS grew its Free Cash Flow at 76.5% YoY, far higher than others.
• DBS has the lowest P/E ratio making the stock relatively undervalued.
• DBS ROIC of 8.2% is marginally lower than OCBC’s 8.75%
• DBS asset growth of 8.3% YoY in 2022, lower than UOB’s 9.8%.
This puts DBS in a far better financial position than the other Singapore banks.
The better performance is also highlighted by DBS stock’s price action. Since Piyush Gupta took over as CEO in 2009, DBS has outperformed OCBC and UOB by an outsized margin and the stock stands nearly 300% higher in the period.
Similarly, since the start of 2020, DBS is up 29% and has outperformed the other two banks vindicating its strategy and execution.
Comparative Analysis with Other Global Banks
DBS shines bright among the global banking majors too as evident below.
• DBS has the highest Return on Equity at 15%
• DBS has the highest Return on Invested Capital at 8.2%
• DBS price to earnings is 6.85 only higher than BNP & Barclays
DBS strong operational efficiency stands out even among the top global bank. Additionally, DBS reported 8.3% annual asset growth in 2022, compared to US banks which have had moderate asset growth or decline.
Since 2009, DBS stock has far outperformed other major global banks and stands second only to JP Morgan.
Notably, DBS has also outperformed the KBW Bank ETF which tracks the performance of US Banks signalling that DBS has been providing stronger growth than the average growth of the US banking industry, particularly during the high-inflation environment of 2022.
The trend is even more apparent when looking at the performance of these stocks since the start of 2020. Among the selected banks, DBS is the only bank that has shown strong gains during the pandemic and stands ~30% higher. Other banks have either posted modest gains or losses.
In addition to providing strong growth, which is reflected in DBS stock’s price action, DBS also has a strong commitment to returning value to shareholders which can be seen from their nearly 4.1% dividend yield.
DBS annual dividend yield has grown by about 100 bps since 2020. Its dividend in 2022 of S$1.5/share exceeded pre-pandemic levels. DBS also announced a special S$0.5/share dividend last quarter reflecting improved earnings profile and strong capital position.
2023 Growth Outlook
Analysts expect DBS to continue its meteoric rise, with an average forecast of 15% growth in 2023. Some analysts expect DBS to be 31% higher while even the lowest forecasts are for -11% decline.
Key drivers for this growth are expected to be:
• Lean operational strategy and structure leading to lower operational costs.
• Capital outflows from China.
• Regional expansion strategy using their digital banking template.
DBS stock has rallied 86% since March 2020, compared to the Straits Times Index which is only 36% higher in the same period. DBS is the largest constituent of the STI and a major driver of growth for Singapore stocks.
Overall, DBS bucked the overall trend in the banking sector and provided growth in an immensely challenging environment by focusing on sustainable growth and lower costs.
What about the banking crisis?
Investing in bank stocks when uncertainty in the sector is so high can be daunting. The collapse of SVB, shuttering of Signature, and acquisition of Credit Suisse has incited turmoil in markets despite central banks stepping in to ease liquidity concerns and avoid contagion.
Amid the crisis there has been discussion of loose regulatory practices and risky bets. However, in Singapore, MAS keeps a tight check on the risk management of banks in the country.
According to Moody’s, DBS bank still has the highest tier credit ratings and none of its holding are currently under watch. Such stellar ratings suggest that DBS has extremely strong capacity to meet its financial commitments, making it unlikely to be affected by any remaining contagion in the sector.
MAS’s strict stewardship of Singapore banks was underscored by a recent outage in DBS digital services. Though the services were promptly restored on the same day, MAS ordered a thorough investigation into the outage. The outage also affected DBS stock price, driving it 1.5% lower but the stock quickly recovered. Both highlight the resilience in the regulatory, operational, and governance practices at DBS.
Trade Setup
In times of elevated stress, stock betas can spike causing share prices to tank on macroeconomic shocks. To harness pure alpha, this paper posits a spread with long DBS and short MSCI Singapore Index futures.
The spread trade ensures that the position remains hedged against a broader market downturn. DBS has outperformed MSCI Singapore index consistently over the past 10 years.
MSCI Futures on SGX (SGP1!) give exposure to S$100 x index price which translates into a notional value of S$30,905. On SGX, lot sizes for individual stocks are 100 which means that in order to balance the notional on both legs, 9 lots of DBS shares are required which translates into a notional value of S$30,042.
Entry: 10.8%
Target Level: 12.5%
Stop Level: 10.2%
Profit at Target: S$ 4,726
Loss at Stop: S$ 1,671
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Specifically, this paper identifies five key drivers powering DBS shares. Against the backdrop of sharp recession ahead, this paper posits a case study delivering 2.8x reward to risk ratio through a spread comprising of long DBS shares and short MSCI Singapore Index futures to gain from expected outperformance.
The DBS Story
Launched >50 years ago, DBS is the largest bank in South-East Asia and rubbing shoulders among global banks with S$743B in assets as of December 2022. Its diverse services cover consumer banking, asset management, brokerage, and digital assets. DBS' robust capital position, strong governance, and solid operational practices, with MAS as the regulator, makes it a bank with the highest credit ratings in APAC.
“Live More, Bank Less” defines the essence of the bank's strategy. DBS aspiration goes beyond being the best bank but aspires to deliver experience that's world class and on par with GANDALF firms. GANDALF stands for Google, Amazon, Netflix, Apple, LinkedIn, and Facebook. And D? DBS, of course.
A key figure in the transformation has been its CEO Piyush Gupta who has helmed its leadership since 2009 and is seen as instrumental in the bank's meteoric rise as a global banking player.
Last year, DBS delivered stunning record profits of S$8.2B driven by surging rates. 2022 was not entirely hunky dory as fees and commissions declined 12% YoY.
DBS expects 2023 to be better with a forecast of double-digit fee income growth plus rising income from cards business. While loan growth slowed with rising rates, DBS continued to gain market share across both corporate and consumer loans.
Key growth driver for DBS in 2023 and for the rest of the decade is the wealth migration from China. Singapore is a key destination for capital taking flight out of China. DBS is strongly positioned to take advantage of this as a trusted and customer-focused banking partner.
Five factors to propel DBS shares ahead:
1. Chinese Wealth Migration
Ultra rich Chinese have been emigrating with Singapore as the preferred destination. China’s crackdown on its business and entrepreneur class with a focus on “common prosperity”.
China faced capital flight of about $150B annually from its citizens migrating. Capital flight in 2023 is expected to be far higher, with some estimates suggesting it could top $100-$200B.
About 10,800 rich Chinese migrated in 2022, the highest since 2019, according to Henley & Partners. China has the world’s second-largest number of ultra-rich with more than 32,000 people holding wealth more than $50M.
DBS holds a key position to capitalize on this trend as the leading and trusted bank in Singapore. It is not just the Chinese but also the wealthy from India, Indonesia and Thailand finding Singapore as a convenient home for them and their wealth.
2. Regional Expansion via Digital First Strategy
DBS’s digitization dovetails nicely into their regional expansion as digitised infrastructure easily transcends geography.
Case in point is DBS' expansion into India. It had its presence in India since 1994. However, it was with the launch of Digibank India in 2016 that propelled its footprint in the country.
Digibank India was the first mobile-only, paperless, signatureless, and branchless bank in India. This allowed them to expand rapidly in the country while India was going through its own financial digitization following demonetization exercise in 2016. This provided DBS with a strong launchpad while keeping operational costs at bay.
DBS India has seen its deposits grow consistently since launch with a huge jump following the acquisition of Laxmi Vilas Bank (LVB). Over the past 3 years, DBS India has doubled its revenue. DBS has been profitable since launch, except for a tiny loss in 2017-18. LVB acquisition enabled DBS to expand its branch presence nearly 18x from mere 30 to >500.
3. Bold Forays into Digital Assets
In 2020, DBS launched DBS Digital Exchange (DDEx) enabling institutional and accredited investors to access digital assets.
With rising regulations for crypto firms, a fully regulated digital exchange like DDEx from a trusted bank such as DBS is a safe haven for digital asset investors.
Success of DDEx is evident in its performance in 2022 when BTC trading on the exchange increased 80% YoY. BTC’s custodied on the exchange also doubled while ETH custodied on the exchange increased 60%. DDEx also doubled its customer base to nearly 1,200 last year.
4. Deep Digitisation
CEO inspired DBS' purpose driven digital adoption agenda in 2014, with a five-year roadmap and a lofty aim of being named the best bank in the world.
DBS approached the challenge by thinking and operating like a major tech firm instead of a bank. It overhauled its internal tech, 90% of which was developed and managed in-house making it cloud-native enabling rapid scaling and easy deployment.
DBS pioneered “Digibank,” a mobile only bank that allowed it to scale rapidly and with low cost per retail customer. Digital customers have two times higher income per client compared to traditional clients with cost to income ratio of 34% relative to 54% for traditional clients.
5. Startup Mentality
Making Banking Joyful. DBS is deliberate in becoming ever more customer-centric by cleverly tailoring each customer journey to be hassle-free and enjoyable. The bank aims to become “invisible” to its customer while meeting their banking, financial, and investing needs.
In instilling a start-up culture, the leadership team continues to cultivate agility, continuous learning, customer obsession, data-driven experimentation and risk-taking across the organisation.
DBS Outperforms other Singapore Banks
Among top three Singapore Banks:
• DBS has the highest ROE at 14.95%.
• DBS operating margins of 41.5% are far higher than others.
• DBS margins are twice those of OCBC.
• DBS grew its Free Cash Flow at 76.5% YoY, far higher than others.
• DBS has the lowest P/E ratio making the stock relatively undervalued.
• DBS ROIC of 8.2% is marginally lower than OCBC’s 8.75%
• DBS asset growth of 8.3% YoY in 2022, lower than UOB’s 9.8%.
This puts DBS in a far better financial position than the other Singapore banks.
The better performance is also highlighted by DBS stock’s price action. Since Piyush Gupta took over as CEO in 2009, DBS has outperformed OCBC and UOB by an outsized margin and the stock stands nearly 300% higher in the period.
Similarly, since the start of 2020, DBS is up 29% and has outperformed the other two banks vindicating its strategy and execution.
Comparative Analysis with Other Global Banks
DBS shines bright among the global banking majors too as evident below.
• DBS has the highest Return on Equity at 15%
• DBS has the highest Return on Invested Capital at 8.2%
• DBS price to earnings is 6.85 only higher than BNP & Barclays
DBS strong operational efficiency stands out even among the top global bank. Additionally, DBS reported 8.3% annual asset growth in 2022, compared to US banks which have had moderate asset growth or decline.
Since 2009, DBS stock has far outperformed other major global banks and stands second only to JP Morgan.
Notably, DBS has also outperformed the KBW Bank ETF which tracks the performance of US Banks signalling that DBS has been providing stronger growth than the average growth of the US banking industry, particularly during the high-inflation environment of 2022.
The trend is even more apparent when looking at the performance of these stocks since the start of 2020. Among the selected banks, DBS is the only bank that has shown strong gains during the pandemic and stands ~30% higher. Other banks have either posted modest gains or losses.
In addition to providing strong growth, which is reflected in DBS stock’s price action, DBS also has a strong commitment to returning value to shareholders which can be seen from their nearly 4.1% dividend yield.
DBS annual dividend yield has grown by about 100 bps since 2020. Its dividend in 2022 of S$1.5/share exceeded pre-pandemic levels. DBS also announced a special S$0.5/share dividend last quarter reflecting improved earnings profile and strong capital position.
2023 Growth Outlook
Analysts expect DBS to continue its meteoric rise, with an average forecast of 15% growth in 2023. Some analysts expect DBS to be 31% higher while even the lowest forecasts are for -11% decline.
Key drivers for this growth are expected to be:
• Lean operational strategy and structure leading to lower operational costs.
• Capital outflows from China.
• Regional expansion strategy using their digital banking template.
DBS stock has rallied 86% since March 2020, compared to the Straits Times Index which is only 36% higher in the same period. DBS is the largest constituent of the STI and a major driver of growth for Singapore stocks.
Overall, DBS bucked the overall trend in the banking sector and provided growth in an immensely challenging environment by focusing on sustainable growth and lower costs.
What about the banking crisis?
Investing in bank stocks when uncertainty in the sector is so high can be daunting. The collapse of SVB, shuttering of Signature, and acquisition of Credit Suisse has incited turmoil in markets despite central banks stepping in to ease liquidity concerns and avoid contagion.
Amid the crisis there has been discussion of loose regulatory practices and risky bets. However, in Singapore, MAS keeps a tight check on the risk management of banks in the country.
According to Moody’s, DBS bank still has the highest tier credit ratings and none of its holding are currently under watch. Such stellar ratings suggest that DBS has extremely strong capacity to meet its financial commitments, making it unlikely to be affected by any remaining contagion in the sector.
MAS’s strict stewardship of Singapore banks was underscored by a recent outage in DBS digital services. Though the services were promptly restored on the same day, MAS ordered a thorough investigation into the outage. The outage also affected DBS stock price, driving it 1.5% lower but the stock quickly recovered. Both highlight the resilience in the regulatory, operational, and governance practices at DBS.
Trade Setup
In times of elevated stress, stock betas can spike causing share prices to tank on macroeconomic shocks. To harness pure alpha, this paper posits a spread with long DBS and short MSCI Singapore Index futures.
The spread trade ensures that the position remains hedged against a broader market downturn. DBS has outperformed MSCI Singapore index consistently over the past 10 years.
MSCI Futures on SGX (SGP1!) give exposure to S$100 x index price which translates into a notional value of S$30,905. On SGX, lot sizes for individual stocks are 100 which means that in order to balance the notional on both legs, 9 lots of DBS shares are required which translates into a notional value of S$30,042.
Entry: 10.8%
Target Level: 12.5%
Stop Level: 10.2%
Profit at Target: S$ 4,726
Loss at Stop: S$ 1,671
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
However, since this position suggested going long on 900 DBS shares, dividends worth S$ 828 would be paid out on 21st April 2023. This would offset the losses from the ratio declining.