【2024.11】Singapore's highest market cap banks! How is DBS's performance viewed?

If you want to rank the most watched stocks in the Singapore market, DBS Bank (DBS) with the highest market cap and the most active trading volume in the entire market will definitely have a place. The historical stock performance of DBS has indeed not disappointed many investors. Since the end of 2011, DBS has risen by about 2.3 times, far exceeding the growth of the FTSE Straits Times Index during the same period. Over more than 12 years, DBS has had an annual compound growth rate of about 9.6%, not soaring but steady.

So, $DBS GROUP HLDGS LTD (DBSDF.US)$ Can it continue its impressive historical performance in the capital markets in the future? We can find the answer from its performance. Every time the company releases its performance, it may also represent a good trading or investment opportunity. But before that, investors need to understand how to interpret its performance.

So how should we interpret DBS's performance? We can focus on three key points: performance growth, risk indicators, and shareholder returns.

1. Performance Growth Trend

First, let's look at the growth of DBS's performance. In terms of revenue, DBS's growth has been fluctuating, with consecutive declines after 2018, but a growth trend has been recorded for two consecutive years starting from 2022.

In terms of net profit, DBS's performance has been more stable. Except for a significant drop in 2020 due to the pandemic, the three-year period since 2021 has seen very steady growth, with net profit consistently reaching new highs.

Looking at the income composition, DBS's income mainly consists of net interest income and non-interest income. For example, in 2023, net interest income accounted for about 67.8%, with less than 1/3 attributed to non-interest income.

Therefore, the fluctuation of DBS's net interest income is a key factor affecting its performance growth. The so-called net interest income is the net income derived from the interest the bank earns from loans minus the cost of attracting savings.

This income is mainly related to two indicators. The first indicator is the size of deposits and loans. The more deposits attracted, and the larger the loan volume, the more interest earned. Over a two-year period from Q4 2022 to Q4 2023, DBS's loan volume remained at around 416 billion Singapore dollars, while the deposit volume fluctuated slightly around 570 billion Singapore dollars, with no significant overall change. In Q2 2024, both the deposit and loan volumes of DBS increased, reaching new highs in recent quarters.

The second indicator is the net interest margin, which is the difference between loan interest rates and deposit interest rates. The larger the net interest margin, the more money the bank earns. We can see that since the fourth quarter of 2022, with the ongoing Singapore interest rate hike process, DBS's commercial bank net interest margin has been gradually increasing, rising from 2.61% in Q4 2022 to 2.82% in Q3 2023. However, in Q4 2023, as deposit costs also began to rise, DBS's net interest margin declined to 2.75%, leading to a quarter-on-quarter decrease in net interest income. In Q1-Q2 2024, DBS's net interest margin rebounded.

In future performance, we can continue to observe whether DBS can maintain steady growth in deposit and loan volumes, as well as whether the net interest margin can continue its upward trend. This is also the key to determining its revenue growth rate. If DBS's performance growth momentum of the past two years stalls, it may also bring pressure on its stock price.

2. The Stability of Risk Indicators

The business model of banks fundamentally revolves around earning interest spreads by attracting deposits at low interest rates, and then lending them out at higher interest rates. Therefore, banks have very little proprietary capital relative to total assets, resulting in extremely high leverage ratios. For example, DBS's asset-liability ratio is as high as 91.6%.

The high leverage of banks brings potential high risks, and banks are one of the important cornerstones of the financial system. Once banks collapse on a large scale, the entire financial market will be in turmoil. Therefore, regulatory institutions have set some hard requirements on some financial indicators of banks.

The first indicator is the Common Equity Tier 1 (CET1) Capital Ratio, which is a key indicator of bank financial soundness, used to measure the proportion between the bank's common equity (common stock plus retained earnings) and its risk assets. This is a regulatory indicator set by the Basel Committee on Banking Supervision, with the minimum required CET1 Capital Ratio of around 4.5%. In addition, banks in different countries may also have additional requirements for capital buffers, but generally not exceeding 11%.

DBS's core capital adequacy ratio in 2024Q2 is approximately 14.8%, significantly higher than the requirements of the Basel Agreement, and also exceeds the regulatory requirements of other banks.

The second indicator is the non-performing loan ratio, which is the ratio of non-performing loans to total loans, also an indicator of loan asset quality. Generally, loans that are overdue for more than 90 days may be defined as non-performing loans, the more of these loans, the more potential bad debts and larger potential losses for banks.

DBS's non-performing loan ratio in 2024Q2 is about 1.1%, slightly above 1%, indicating relatively good loan quality.

The third indicator is the provision coverage ratio, which is the ratio of funds reserved by the bank for non-performing loans to the amount of non-performing loans, representing the extent to which the bank covers potential losses. The higher this ratio, the more attention the bank pays to potential loan loss risks and the more stable the operation.

DBS's loan loss provision coverage ratio in 2024Q2 is approximately 129%, providing a more than adequate reserve for potential loan losses, showing a relatively conservative approach.

For future earnings reports, we can continue to monitor DBS's core capital adequacy ratio, non-performing loan ratio, loan loss provision coverage ratio, and other risk regulatory indicators to see if it can maintain financial prudence. If there is a trend of adverse changes, it may require more attention.

3. Shareholder Returns

Many well-managed bank stocks, known for their generous dividends, are often referred to as dividend stocks by investors. Dividends reflect the importance a listed company places on its shareholders and have always been highly favored by investors.

The indicator for measuring the richness of dividends is the dividend yield, which is the ratio of dividends to total market capitalization. The higher the dividend yield, the higher the potential return, assuming the stock price remains unchanged. Of course, investors also need to consider other factors comprehensively in order to make decisions on whether to invest in high dividend companies, considering the risk of stock price fluctuations.

Taking the data since 2010 as an example, DBS has been distributing dividends to shareholders every year, which is relatively friendly. Over a period of 14 years, the accumulated dividends amount to approximately 34.9 billion Singapore dollars, while the total net profit during the same period is about 71 billion Singapore dollars. The dividend amount accounts for about 50% of the net profit, which is relatively good as it considers the need for shareholder returns and reserves some funds for business development.

Looking at the dividend yield, as of mid-April 2024, DBS's dividend yield is approximately 5%, which is not a low figure. Coupled with its recent favorable stock price trends in the past few years, the historical holding experience may still be good.

Finally, to summarize,

For DBS performance, we can focus on three points: revenue growth, risk indicators, and shareholder returns.

In the past two years, DBS's revenue and profit have continued to grow. However, with the net interest margin no longer rising continuously, its performance growth is also under pressure.

Regarding risk indicators, DBS's core capital adequacy ratio, non-performing loan ratio, and provision coverage ratio are at relatively stable levels.

In terms of shareholder returns, historically DBS has been relatively friendly to shareholders in terms of dividends and dividend yield.