Would Warren Buffett Buy DBS Group Holdings Ltd?

Banks used to be some of the safest investments around. Investors would buy them for their reliable source of income. And most of the time they delivered.

But since the financial crisis of 2009, many investors have, understandably, become a little cautious about these once seemingly unassailable institutions.

Trouble with banks is that they can be a little opaque. So impenetrable in fact are their accounts that even regulators have trouble making head or tail as to what goes on inside these money-making machines.

But banks don’t trouble Warren Buffett. That said, he is quite discerning about the type of banks he is willing to buy.

So would he be attracted by DBS Group Holdings Ltd (SGX: D05)?

Buffett doesn’t like high earnings volatility. He wants to be able to predict with some degree of certainty the profits that a business is likely to make. Banks rarely conform to that model, simply because of the nature of their business. When time are good they can make lots of money. When times are tough, they can get hit.

Over the last decade or so, DBS has delivered an average bottom-line profit of about S$2b with a standard deviation of about S$1b. Last year’s profits were an impressive S$4b. That is a 10% improvement on the previous year, which is roughly the rate at which the bank has grown its net income annually since 2001.

The steady growth in profits reflects the consistent growth in loans at a good margin. This has helped to deliver a high Net Income Margin. More importantly, from a shareholder’s perspective, it has also delivered a consistent Return on Equity and Return on Asset over the years.

On some of the key measures DBS Group fares well, which is likely to catch the attention of Warren Buffett. However, he might wince a little at the expensive valuation at 12 times earnings and 1-1/2 times book value.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.