Should you buy DBS Group Holdings Ltd (SGX D05) now? $19 seems to be a popular price that people will talk about DBS Group Holding. In wealth management, investing in good companies are essential to build up the capital to achieve our financial freedom. This article will hold some of my thoughts I have regarding DBS Group and some of it will shock you. Is it a mistake or will we have regrets? (Read all the way down).
Is DBS Group a Good Company and Undervalued?
These are the numbers that I look for in a banking stock. You can find this numbers from the annual report of DBS Group. We want to analyse whether the bank is first a profitable and efficient bank.
To look at profitability, we want to look at the Net Interest Margin (NIM) to be as high as possible. Banks earns a spread by borrowing money from people like me and you and giving them out as loan. We also want to see non-performing loans (NPL) to be as low as possible. There will be people who will default on their loans given various situation, we want to see it as low as possible.
Next we want to see the efficiency of the bank in terms of operations and per dollar invested. We have used the cost to income ratio which we want as low as possible. A lower cost to income ratio means their expense is low as compared to the revenue. Return on equity (ROE) we want it as high as possible.
Personally, I think it is quite a good company based on these set of numbers.
The valuation is also attractive at PB 0.99. This means you are buying it at 99 cents for every dollar it is worth. On dividends, it gives a 6.95% dividends based on previous dividends.
Verdict
It really looks not bad isn’t it.
The Forgotten Track Record
As investors, we like to talk about track record. I realised that this only applies to numbers, valuations and also share prices. There are numerous things we forget and we are more forgiving and tolerant to these companies who have better numbers. Let’s talk about the forgotten track record that DBS Group has.
2020: Hin Leong Trading
DBS has the highest loan exposure to HLT at US$290 million, while OCBC and UOB are owed US$220 million and US$100 million, respectively. The sharp plunge in oil prices, along with the COVID-19 pandemic, had brought one of Asia’s largest oil traders to its knees. (Source: The Business Times: DBS, OCBC, UOB faced with over US$600m total exposure to Hin Leong)
The exposure is considered immaterial to DBS Group’s Profits.
2017: Energy Saga
DBS Group Holdings Ltd. reported a surprise drop in third-quarter profit as Southeast Asia’s largest bank boosted bad-loan allowances more than sixfold in an effort to deal with its problem lending to the regional oil and gas services sector. (Source: Yahoo Finance: DBS Profit Sinks as Bank Tries to Put Bad Energy Loans Behind It)
Allowances for bad assets of S$1.66 billion compared with S$261 million in the year-earlier period.
This would easily be blamed on the cyclical energy market when oil and gas services first got the worse hit.
2007: Lehman Brother Mini Bonds
Following the collapse of the Lehman Brothers, about 10,000 retail investors in Singapore lost all or a large part of their investments total-ling over S$500 million in structured investment products linked to the American investment bank. They were mis-sold these relatively high-risk products to investors, many of whom were the elderly and less educated. (Source: NLB: Lehman Brothers Minibond saga)
There are perhaps many more examples but forgotten with time.
The Way Forward
This section is my own personal opinion. While it may or may not contribute to the bottom line of DBS Group, I strongly believe it will contribute to a great brand which is largely intangible.
$500 minimum deposit of a fine of $2 will apply
I struggle to accept that DBS bank, our people’s bank have such a rule. The people who are most needy will be those with less than $500 as their minimum deposit. These people are from the lower income group and would need as much liquidity as they can get. I also struggle to accept that additional dormant accounts would cost the bank money. In my limited knowledge, I can only guess it will take extremely huge number of dormant accounts to really make a dent in the bottom line of the company.
Legacy Issues
DBS remains the bank to have the longest queue for its’ ATM or for bank tellers. I can only guess vast amount of paperwork that still continues to be done today. I’m also unsure of any technological advance in the company as we are only exposed to the mobile app and internet banking features which largely remains the same since 3 years ago.
Fintech
Fintech has disrupted lives around the world. I haven’t seen much in this space for DBS Group. The one that is most impressive on their website is was dated July 2018 for projects in 2017. (Source: Case study: DBS – the edge)
Negative Interest Rates
With the world moving towards negative interest rates, will we follow suit? Will our NIM will be affected in the future.
No one will care about your money as much as you do.
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