DBS Group Holdings Ltd (SGX: D05)

Summary notes on the Singapore Banks
DBS

Last update: 2016 Aug 25th

Banking outfit DBS Group Holdings Ltd (SGX: D05) is not only Singapore’s largest bank by assets, it is also one of the local stock market’s largest companies in terms of market capitalisation. DBS is a leading financial services group in Asia with 280 branches across 18 markets.

Revenue Sources

Based on the latest 2015 annual report, its different revenue sources are as follows:

Observations

1. Net interest income = traditional banking business of borrowing and lending
Accounted for 66% of the bank’s total income of S$10.78 billion.

Implications: A rising interest rate environment would be beneficial for the bank’s net interest income. Since the net interest income is heavily affected by the difference between the interest paid to borrow (i.e. from depositors and other financial institutions) and the interest it receives from loans it has given i.e. spread between the interest rates a bank borrows at (for instance, the rate a bank pays its depositors) and the rates a bank lends at (for instance, the mortgage rates a bank charges) aka net interest margin. The rates are affected by the prevailing interest rate environment.

2. Other revenue streams = non-interest income, involves brokerage services, investment banking services, trade and transaction services, wealth management services, credit card-related activities, and more.

Observations

Non-interest income made up nearly one-third of DBS’s total income in 2015.

So, it could be an important source of diversification for DBS if there are headwinds in the traditional banking business of borrowing and lending.

Operational Highlights

1. DBS’s net interest income rose in the reporting quarter due to an increase in the net interest margin from 1.75% in the second-quarter of 2015 to 1.87%. Meanwhile, net fee and commission income benefited from increases in investment banking.

2. Other non-interest income grew from higher trading income and gains from investment securities.

3. Customer loans for the reporting quarter grew by 2% from a year ago to $284.8 billion.

4. The non-performing loan (NPL) ratio was 1.1%, up slightly from the 0.9% recorded during 2015’s second-quarter.

5. For the second-quarter of 2016, average customer deposits was $310.1 billion, representing 2% growth compared to the same quarter a year before.

6. The loan to deposit ratio was 91.8%, a small climb from the 91.6% seen in the second-quarter of 2015.

Based on regulatory requirements from the Monetary Authority of Singapore, banks in Singapore must have the following Capital Adequacy Ratios (CARs): Common Equity Tier 1 (CET1) CAR of at least 6.5%; Tier 1 CAR of at least 8%; and Total CAR of at least 10%.

DBS can be considered as well capitalized given that its CARs are comfortably higher than MAS’s requirements. The bank has a CET1 CAR of 14.2%, a Tier 1 CAR of 14.4%, and Total CAR of 16.3%.

Reference: fool.sg

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