The AGM season begins again with DBS starting the ball rolling.
After the strong performance in 2023, I wasn’t expecting another record year of earnings by DBS Group Holdings (SGX: D05). Total income increased by 10% year-on-year (YOY) to S$22.3 billion, while net profit rose 11% to an all-time high of SG$11.4 billion.
These impressive results also mark the end of CEO Piyush Gupta’s 15 years of transformative leadership at Singapore’s largest bank and the only Singapore company with a market capitalisation exceeding S$100 billion.
Here are my key takeaways from the AGM and Annual Report.
Interest Rate Cuts: Cushioning the Impact
DBS has significantly benefited from the steep increase in interest rates over the past few years.
However, the natural question that arises is: what will happen when interest rates inevitably start to fall?
This is where the group’s proactive approach to managing the interest rate cycle becomes particularly impressive.
Recognising the potential for a reversal, DBS has strategically increased its fixed-rate assets and extended its asset duration. These deliberate actions have reduced the bank’s net interest income (NII) sensitivity from around S$18-20 million per basis point in 2021 to a much lower S$4 million last year.
This significant reduction allows DBS to mitigate the impact of potential US Fed rate cuts through the continued growth of its loan book and non-interest income (Non-II).
To illustrate, even if interest rates were to be cut by another 1% this year, the projected impact due to this on DBS’s NII would be a decrease of S$400 million. This figure represents a manageable 1.8% of its total income, which can be made up from the expected increase in loan volume.
Furthermore, with a robust total wealth management income of S$5.2 billion, the group would only need to achieve a growth of less than 8% in this segment to offset the NII reduction due to the decrease in net interest margin.
Leadership Transition: A Seamless Continuation
This year’s Annual Report is an interesting read as it featured the transformation that DBS has undergone over the past 15 years. I am most impressed with the improvement of its return of equity (ROE) from 8.4% to 18% during this period.
Numbers aside, DBS’s transformation provides another example of how having the right people onboard can drive a company from good to great. As Piyush noted in the Annual Report, “Of these, effecting culture change was arguably the most challenging but also the most game-changing.”
That’s consistent with my personal experience when I was still in the work force. While any organization can articulate a compelling vision, it’s the people and culture that truly bring it to life, a feat few can achieve.
This brings about another question: can this momentum be sustained with the new CEO Tan Su Shan?
In my mind, I have no doubt she can uphold the high standard set by her predecessor. While she has big shoes to fill, Su Shan’s strong credentials give me confidence.
If you aren’t aware, the high ROE wealth management business was built and led by her in the initial years when she joined DBS. Beyond that, she has experience leading DBS’s consumer banking and institutional banking businesses.
Crucially, she shares the same length of service as Piyush and has been part of the same transformative journey as many other DBS staff, making a smooth transition highly likely.
Business Outlook: Resilient Amid Uncertainties
Acknowledging the increasing external headwinds from ongoing trade wars and the rapid pace of technological advancements, Su Shan nonetheless expressed confidence in DBS’s resilient business outlook.
This optimism is underpinned by several factors. As previously mentioned, the anticipated impact of rate cuts is expected to be well-managed.
Furthermore, DBS continues to leverage its strong presence in Asia’s key markets: Singapore, Hong Kong, China, India, and Indonesia.
The outlook is reflected in the specific financial guidance.
CFO Chng Sok Hui, in the Annual Report, projected a slight increase in NII and a high single-digit growth in Non-II. Additionally, specific allowances (SA) for credit losses is expected to normalise to 17-20 basis points of loans for FY 2025.
These projections point towards pre-tax profits similar to FY 2024, with net profits to be slightly lower due to the implementation of a global minimum tax of 15%.
Initially, I was perplexed to see how stable NII and rising Non-II wouldn’t translate to higher pre-tax profits. However, upon further analysis, I realised that the the likely explanation is the increase in SA to account for rising uncertainties. For reference, SA for FY 2024 is at 13 basis points.
Regarding net profits, the impact of the 15% tax appears manageable. Assuming pre-tax profits remain consistent, net profits will just decrease by approximately 3% to around S$11 billion.
Other Takeaways from Shareholders Q&A
Here are some other interesting insights arising from the shareholders’ questions:
Regional Performance: Shareholders also inquired about the performance of DBS in the South and South East Asia.
While the cost-to-income ratio of 60% for these segments is currently higher than in Singapore and Hong Kong, it has shown a reduction over the years. Looking ahead five to ten years, these regions have the potential to contribute more significantly to the bottom line.
Johor SEZ: Interestingly, DBS does not have a license to operate in ringgit, meaning the Johor Special Economic Zone (SEZ) is not currently part of their expansion plans.
The OCBC Ltd (SGX: O39) and United Overseas Bank Ltd (SGX: U11) shareholder in me rejoiced at this news.
Competitive Edge Against FinTech: While FinTech has flourished in recent years, DBS has kept up with similar offerings on its digital platform and continues to grow its customer base.
However, Su Shan noted that the bank could improve its marketing efforts for its digital platforms, particularly targeting younger users.
Additionally, much like iFAST Corporation Limited (SGX: AIY), where some competitors are also clients, DBS benefits from similar relationships, highlighting its established infrastructure and trust within the financial ecosystem.
Another key advantage DBS holds over FinTech platforms is its significantly larger data pool.
This allows DBS to leverage AI more effectively, potentially ensuring it stays ahead in its technological offerings, mirroring the data-driven advantage of established tech giants.
Stock Split: Recognising that DBS’s stock price appreciation has made it more expensive for some investors, any decision of a stock split is contingent on the ongoing discussion by Singapore Exchange Limited (SGX: S68) regarding the potential trading of single stock units.
To be honest, unlike last year’s AGM, I did not leave with a “wow” feeling. This is likely due to my increased familiarity with its business operations. While I am confident that Su Shan and her team will continue the good work, I am going to miss Piyush for his sharp thinking and witty responses.
I sincerely hope that he will enjoy his new adventure and may Su Shan also grow bigger…metaphorically, in her new role.
Discover more from The Fat Investor
Subscribe to get the latest posts sent to your email.