Save this DBS article. Print it out. Put it somewhere safe in your drawer. Heck, put this in your underwear if you must.
Because I want to share this crucial topic at stock market highs on how I would buy DBS at “dirt-cheap” prices and for dividends.
DBS: The “Best Bank in the World”
At S$144 billion market cap, DBS Group is Singapore’s largest bank. It controls S$574 billion in deposits and owns S$437 billion in loans.
Despite a bank’s complex financial reporting, banking is a remarkably easy business to understand.
First, it takes in deposits from its retail branches and pays these deposits a small rate of interest.
Then, DBS uses these deposits to lend to companies and consumers at much higher interest rates.
The money DBS earns on its loans exceeds what it pays for deposits, it earns a spread. This is called net interest margin – or how I would commonly measure a bank’s profit margins.
I’ve worked in the financial industry before. But I’m far from an expert in banking. But to know how to buy DBS at “dirt-cheap” prices, you first need to know how to assess DBS loans and deposits.
So let’s break it down here.
DBS has a healthy loan book
At S$805 billion of total assets, It has ~S$439 billion of loans. Unlike US banks that are more aggressive in investment banking, DBS is a traditional commercial bank.
It lends out half of its assets as property-related loans, including both mortgages and building construction.
This is crucial…
In Singapore, property loans are high-quality. Mortgages are tightly regulated and we know borrowers are locals with steady jobs. I’m not afraid of a country-wide default.
What’s more, it’s not common for Singapore’s property market to face brutal collapse – Limited land, growing population and tight government policies reflect a resilient property market.
Lastly, DBS’s non-performing loans are less than 1%.
In other words, DBS loan book is one of the safest in the world, which forms the bedrock of its entire business.
This brings me to my next point.
In case you missed my recent posts: |
DBS strong deposit franchise
Singapore’s biggest bank is the king of deposits. As a result of DBS long-standing reputation, it has built a fortress deposit – totaling S$574 billion, commanding the biggest deposit market share in Singapore.
This tells me: Of its S$574 billion in deposits, it only lends out 76% as loans. This means two things.
First, DBS has plenty of firepower to ramp up lending if it wants to.
Second, it doesn’t borrow heavily from other banks to grow its business. Instead, it relies on cheap deposits it has gathered over the decades.
Now, it’s important to know a bank’s loans-to-deposit ratio. Why? You can tell DBS is an asset heavy business. And you’ll know its business is also dependent on interest rates and the global economy.
The real way to value Singapore banking stocks like DBS is to determine the price to pay for its assets. Because a bull market will ultimately focus on the relationship between DBS loans and deposits. I’ll explain.
How I buy DBS at “dirt-cheap” prices for dividends
At the end of the day, if you understand cyclical patterns of businesses, you’ll know how to measure whether a stock is in the early stage and offers good current value, or if the cycle is in the later stages where most of the value is being realized.
This way, I can better improve my total returns and minimize downside risks investing in Singapore bank shares.
Here’s the thing: DBS is an “asset play”. DBS controls loans, investment securities, financial products and so on. The Singapore bank giant takes advantage of deposits to make a profit.
And the way to identify this is to compare its share price versus its asset value. The way I look at it is the P/B ratio.
You see, the best time to buy is when no one likes the stock. And that best time is when the stock is trading at its historical average P/B ratio. Has it happened before?
Yes, there are periods when DBS shares trade below its average P/B ratio (see green circles) – 2009, 2011, 2016, 2020. DBS shares usually trade between 1.0-1.7x its book value (or net assets).
So, plenty of opportunities.
Are Singapore banks shares at all-time highs?
Today, Singapore bank shares are trading at all-time highs. But it’s more than just looking at price to determine how “expensive” or “cheap” a stock is.
What I’d do is figure out if a Singapore bank shares is in the danger zone.
For instance, the worst time to buy DBS is when shares trade close to historic high P/B ratio. Recall when DBS traded at 2.5-3.0x its PB ratio in 2007. It’s scary. Shares fell over 64% from peak to trough.
What’s more, every time DBS shares are traded at P/B valuations, it peaks its dividend payout. Today, the question to ask: is DBS dividends peaking again?
You see, this is because these are periods when a bank’s asset growth reached peak cycles. Like I’ve said, we have to look at a bank’s assets to determine how to buy them for dividends.
Today, the problem with Mr. Market’s outlook with DBS is its incoherence, because a bulk of DBS revenues and profits are driven by its traditional loans business.
However, as I’ve said in my previous article on DBS latest earnings, its recent loan growth has been falling over the last few quarters.
These cycles are what will cause shares to move in a cyclical manner.
My final thoughts
Given the strength of DBS’s franchise and its growth, the stock still isn’t cheap in question today.
So… How I would invest in DBS shares for dividends is simple. I follow Warren Buffett’s playbook: I’ll buy when there’s fear on the streets, not when Mr. Market is euphoric.
This means, based on my PB ratio indicators, I want to buy DBS when it trades closer to its 1.0x P/B ratio, or at a discount.
That’s also when it has a much higher dividend yield. For instance, DBS shares traded ~7% dividend yield during the COVID-19 pandemic.
And that’s when you get a great chance to buy DBS at “dirt-cheap” prices for dividends.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
