“Would I buy at $35 today?”
They say money doesn’t solve everything. And often, it doesn’t make you any happier either.
But you see…
Money is power
And power can be used for both good… and not so good.
You can borrow money, get yourself heavily in debt, spend yourself away… and get into trouble.
Or you can use money to invest and make even more money.
DBS Group (SGX:D05) is the 500-pound gorilla that uses money to make more money.
But the biggest Singapore bank doesn’t use its own money this way…
See, DBS, like any other banks, have the power to use other people’s money to make even more money. DBS does this through deposits. And…
Deposits are the fuel of a great banking business
At S$91 billion market cap today, DBS holds close to S$500 billion worth of deposits. You and I put all these money for sake keeping in DBS. In return, DBS pays us a small deposit fee for taking our money.
Then, what DBS does is this — they lend out S$405 billion of deposits to big companies and individuals for a much longer term, at a much higher interest rate. The difference in interest that they pay on deposits and the higher interest they collect from the loans is what people call — the net interest margin (NIM).
So, the more the deposits, the more they lend.
And the higher the NIM, the more profitable the bank.
Here’s what’s even better. When interest rates go up, DBS can charge even higher for lending their money. But at the same time, DBS still get to pay the same low deposit rates to us.
That’s why DBS shares have climbed up so much. In fact, over the last year, DBS shares have grown by 36%. It’s one of the best Singapore stock performers.
Source: ShareInvestor Webpro
And the reason is simple. Recently, the biggest central bank in the world — the U.S. Fed is telling everyone they are going to raise interest rates.
And that’s going to make DBS even more profitable in the future.
Now, the problem with DBS is this.
Banks like DBS can’t exactly grow their deposits too fast. Deposits are “sticky”.
Even if you increase deposit rates or drop them, no one is going to take out all their money and shift it elsewhere. It doesn’t make sense.
And over the last nine months, deposits grew just by 4.9% (see below).
Source: DBS 3Q2021 Presentation Slides
So what would a smart bank like DBS do?
The answer: wealth management.
Wealth management is finance parlance for advising the affluent and high net worth individuals with their money.
Unlike deposits, DBS charges a fee for advising their customers on their money.
Today, Singapore is considered a major wealth hub for many international investors. Over the years, you’ll have read news about businessmen, entrepreneurs and many other wealthy people putting their money in Singapore, setting up “family offices” etc etc.
And DBS wants to gather as much of these assets as possible.
There’s only so much deposits you can collect. But growing wealth management assets is the next big thing. That’s why DBS bought over ANZ wealth management business in 2018.
The more DBS grow their wealth management assets, the more money they make. This is the next closest thing to using other people’s money.
Because… money is power.
The more assets they collect, the more money they make.
Over the last nine months, fees coming from wealth management grew S$1.1 billion to S$1.4 billion.
Like what the CEO, Mr. Piyush Gupta said: “retail AUMS have been rising to several billion dollars.”
Source: DBS 3Q2021 Presentation Slides
But what’s better is, DBS has reported overall solid results despite the COVID pandemic/Omicron variant.
Because, over the last nine months for 2021, net profits shot up 46% to S$5.4 billion. Its loans grew 9% and it controlled operating expenses very well.
DBS’s net interest margin for its 9M21 has came down lower to 1.45%, down from 1.67% over a year earlier. But the market wasn’t shocked by this. Because it knows, at some point, interest rates are going to go up, and that means DBS is going to profit from a higher interest rates environment.
What’s more during its latest third quarter results, wealth management income is up 23%, and have gathered 13% more assets compared to a year ago.
Would I buy DBS at $35 today?
The short answer is no.
You must think I’m crazy. I usually tell people DBS is a must-have in everyone’s stock portfolio. But Here’s a quick disclaimer — I’ve held DBS for close to 10 years
And the thing is, at S$35, DBS current dividend yield trades at a low 3%. To me, it looks silly to buy at this “dividend yield level”. Why? Because historically, DBS has seen better days with a much higher dividend yield. Even if today, DBS pays equal to its 2019 dividends of S$1.20, its dividend yield trades at only 4%.
It’s not too low, but not exactly cheap either.
Sometimes investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
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