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The Three Numbers That Solidify DBS Group

Banks have the ability to generate a good Return on Equity. DBS Group (SGX: D05) is no exception.

Singapore’s largest bank generated as much as $10.90 of bottom-line profit for every $100 of shareholder equity. That is on par with the median for the 30 companies that make up the Straits Times Index (SGX: ^STI).

The bank’s high RoE can be attributed in part to its above-average Net Income Margin of. It makes $44.10 profit on every $100 of revenue it generates. Revenue in this case comprises of the interest it charges on loans less the interest it pays on deposits, plus the gains it makes on trading activities.

The same cannot be said of its Asset Turnover, which, at 0.021, is very low. But there is good reason for that. DBS Group has a shedload of assets – some $456billion in total. The bulk of the assets are made up of loans.

DBS Group also makes use of leverage, which is not surprising. It is, after all, a bank, so a Leverage Ratio of 10.9 is not altogether uncommon.

Thing is every dollar that is deposited at the bank is effectively a liability. That’s because every dollar that is put into a savings or current account is treated as a loan to the bank. We are lending money to the bank, on which we hope to earn some interest, if we are lucky.

By dismantling the Return on Equity for DBS Group, it is easy to see why the bank is solid. Its RoE of 10.1% is the product of a mouth-watering Net Income Margin of 44.1%; a low Asset Turnover of 0.021 and a hefty dose of Leverage of 10.9.

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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.