I’m going to talk about DBS shares today.
DBS Bank (SGX:D05) is the titan of Singapore’s financial industry.
Before I get down into details, here’s what you need to know about banks.
Banks are simple businesses.
They take other people’s money (as deposits), then lend it out to companies and people who need money at a higher interest rate.
Now here’s why DBS can be at the top of their game.
The thing is, DBS has amassed a huge volume of deposits.
In fact, DBS holds a 25% market share in Singapore’s deposits.
While OCBC and UOB has 17% and 21% market share respectively.
You can find my OCBC Shares: Your Complete Guide 2021 here.
DBS knows the key to a great banking business is not about lending money at the highest possible interest rate.
Because that will be too risky.
But DBS focuses on collecting as much deposits instead.
Amassing huge deposits give DBS huge financial firepower.
Or what I call “scalability”.
Years back, DBS bought over Post Office Savings (POSB) last time.
And it was pivotal to DBS.
Back then, in 1976, POSB had one million depositors and deposits crossed the S$1 billion mark.
POSB was flushed with deposits.
POSB was one of the biggest banks in Singapore then.
And had the largest number of bank branches found in the neighbourhood of Singapore.
By buying over POSB, DBS can reach out to as many people as possible through POSB’s extensive network.
And over time, DBS built an impressive amount of deposits.
And over time, DBS also established itself as a safe and reliable bank.
People trust the red and black logo.
This is DBS’s true “competitive moat” — A strong deposit franchise.
DBS can pay its depositors a very low interest rate this way.
Paying very cheap deposit rates, DBS can lend to high-quality, blue-chip companies at a low interest rate.
And still make money.
This is called the net interest margin. It measures the profit difference in what DBS makes from lending out money and what interest rate DBS pays to depositors.
Also, DBS return on equity (ROE) has averaged 12% (excluding the COVID pandemic in 2020).
ROE measures how much a bank makes for every dollar of shareholders’ money invested in the bank.
With so much deposits, DBS has the firepower to lend to as many companies and individuals as possible.
This is how DBS wins the volume game.
And because it has so much deposits, DBS can choose to not lend out all their deposits.
And still make money. This makes it a safe bank.
For instance, in Dec 2020, DBS lends out S$371 billion to companies and individuals.
But it holds a total S$465 billion of deposits (see Casa, FD and others below).
DBS “loans-to-deposit” ratio is 80%, This means it lends out less than the money it keeps.
Loans-to-deposits ratio is a great measure to see a bank’s financial position.
And that’s why DBS is resilient to many economic crisis.
Source: Company Presentation
DBS shares: Next area of growth
DBS’s strong deposit franchise as a safe and reliable bank, naturally attracts a lot of “high net worth individual money”.
And that’s important.
Because the next stage of growth is wealth management.
DBS’s wealth management business has contributed a third to its overall revenues.
And continues to benefit from the rising high networth individuals in the region.
DBS holds S$264 billion worth of high networth individual assets in 2020, up from S$134 billion in 2014.
More and more people are coming to Singapore to park their wealth.
Big investors are even moving their wealth into Singapore, as a home-base to invest in Asia.
Why DBS shares will continue to pay steady dividends
So far, DBS has rewarded shareholders well.
If you ask me, I think DBS will continue to be a steady dividend payer.
It may not have a strong dividend growth, but its dividend pay out has been consistent.
DBS grew dividends from S$0.26 per share in 2001 to S$1.50 per share in 2019.
The thing is, people were worried about last year’s COVID pandemic dividend cut.
But I think this is temporary. DBS financial position is strong.
Even if companies DBS lend out to defaults because of the pandemic, it wouldn’t affect DBS one bit.
DBS has so much deposits, and lends out money to so many companies across different industries.
A few defaults wouldn’t hurt the bank.
Remember the oil price crash back in 2015? Many oil & gas companies went bust.
But DBS still came out financially strong.
Unless the entire Singapore economy comes to a halt, I think DBS will still remain as the king of Singapore banking.
Let me know what you think about DBS shares. Feel free to drop me a comment below.
If you like to find other high-quality blue chips, be sure to check out my 10 Best Singapore Blue-Chip Stocks to Buy in 2021.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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Very little factual information to support your conclusion. Many of the statement above more like opinion, not an in-depth analysis
Thanks for the feedback 🙂 I’ll work on that. These are my personal thoughts more than putting too much data. But I’m always happy to discuss and link all my numbers and analysis in the comments section here. Feel free to ask me about it.
Thanks for your insights. Wonder how significant is the “Price to NTA” for Singapore banks?
Some numbers I’ve crunched myself:
The historical book value is around 1.3x for all 3 Singapore bankcs since 2008. Right now, current Price to NTA, or simply P/B ratio is this:
Hope this helps 🙂