A Local Bank That Is Effective in Managing Bad Loans

A man runs past Development Bank of Singapore (DBS) logos at a DBS function in Singapore in this July 5, 2013 file picture. Singapore's DBS Group Holdings Ltd said on July 31, 2013 it would not pursue a $7.2 billion takeover of Indonesia's PT Bank Danamon, a deal that had been stuck in limbo after regulators threw a spanner in the process. Picture taken July 5, 2013. REUTERS/Edgar Su/Files (SINGAPORE - Tags: BUSINESS LOGO)

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Company Name: DBS Group Holdings


Stock Name/Ticker: DBS Group Holdings / DO5

Coverage Region: Singapore


DBS is Singapore’s largest bank with SGD 450 billion of assets and market capitalization of SGD 34.3 billion. DBS has a growing presence in Greater China, Southeast Asia and South Asia. It acquired Societe Generale’s Asian private banking business in 2014 for SGD 279 million. The deal gave DBS’s private clients access to SocGen's European products and services.
There are expansion plans to tap into the wealth management section as seen in the recent news of bidding for Barclay’s Asia Wealth unit.
It has been investing on technologies such as mobile payment apps as well as partnership with IBM to develop artificial intelligence to provide contextualised and customised wealth advice to high net worth clients.

FY 15 Income Breakdown by Business Segment (figures based on FY15 financial statement)


FY 14 Income Breakdown by Business Segment (figures based on FY15 financial statement)


In the current tumultuous economic climate, we would like to know if DBS has the financial ability to weather through it unscathed.


It is the largest bank in Singapore with 52% market share of the saving account balances (in 2014). Most of the baby boomers, Gen X and Y grew up opening their first account with POSBank which has since merged with DBS. Out of convenience, many would prefer to remain with DBS. The main moat would be cost advantage, with weaker moats in terms of switching cost and strong branding. Temasek Holdings having 11% stake in DBS is also a booster.


We shall look at the Net Interest Margins (NIM), Positive Cash-flow, Return on Assets of > 1.2 and Efficiency Ratio based on the past 7 years financial data.

NIM is a check to see how well the bank manages their interest expenses in order to generate returns from investment. The higher the NIM, the better would be the bank at managing the expenses to generate favourable returns.
DBS’s NIM has been improving in the last four years.

Comparison table among the 3 top local banks in Singapore:


1.77 (for Year 2015)

For the past 7 years NIM range was from 1.62 to 2.02

1.67 (for full year 2015) 1.77 (for full year 2015)




Cash-flow is inconsistent due to the nature of the business even though it has been positive from year 2013 to 2015.
It failed in RoA. It was below 1.2 for all the years except 2006. OCBC’s RoA was 1.14 for 2015 and UOB’s RoA was 1.10 for 2014.
On the other hand, efficiency ratio has been favourable. It is on a constant drop from 86.4% in 2005 to 44.4% in 2014. Low efficiency ratio means that the bank is spending less of its revenue on non-interest costs hence demonstrating better cost discipline.


With the current economic slowdown, specifically in Singapore and Hong Kong, the demand for loans and credit have also been reduced. Banks are more stringent in granting loans. At the same time, the lower demand could also be due to business owners taking a more cautious stand. Regulations such as Singapore restriction on property loans is also a cause for the low demand. Consequently, this would result in lower profits for the Bank.


We see this as an asset play company with a Business Confidence (BC) of 7.5. At the current price of $13.69, the book value is 15.82. Based on P/B =1, it is currently undervalued with a Margin of Safety (MoS) of 13.46% and position sizing at about 1%.


Banking veteran, Piyush Gupta has been leading the Group as CEO since 2009. His previous experience includes: CEO for Southeast Asia, Australia, and New Zealand at Citigroup, senior managerial roles at Citibank in India, country officer for Indonesia, Malaysia, and Singapore.
DBS Group's board consists of nine members, seven of whom are independent directors, including Chairman Peter Seah Lim Huat who joined in 2009 and assumed the chairman's post in 2010.

The management team has been strategically expanding the company through major acquisition spree and will continue to do so.


With the increase in interest rate, the NIM is likely to improve with re-pricing of loans rates.
Current NPL (Non-Performing Loan) is 0.9 which they have maintained for the last couple of years. This shows that the management has been effective in managing the bad loans which put them in good stead during the economic downturn.
With the expansion in Asia and the commitment to improve the banking digital technologies, DBS has plans to keep itself relevant and competitive for the long run. If the Barclays deal goes through, it will benefit the bank.


The cyclical decline in general economic condition is the bank’s greatest risk. However, if the bank has adopted cautious lending policies with a strong balance sheet, positive cash-flow for 2015 and 2016, they may weather through the storm well.

[Case study written on 24 Feb 2016 by Darrell, Singapore]