The Different Ways DBS Group Holdings Ltd Makes Its Money

The legendary investor Warren Buffett once wrote that he and his business partner “look for companies that have a) a business we understand; b) favourable long-term economics; c) able and trustworthy management; and d) a sensible price tag.”

It underscores how important it is for investors to really understand the business that a company is in.

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. So, I thought it’d be interesting to look at exactly how the bank makes money.

We can do this with the simple chart below taken from DBS’s latest 2015 annual report. It shows the bank’s total income (essentially its revenue) over the past five years:

DBS total income summary
Source: DBS 2015 annual report

We can see that DBS’s total income is categorised into two main groups: Net interest income and non-interest income. The former accounted for 66% of the bank’s total income of S$10.78 billion.

Net interest income comes mainly from what can be understood as a bank’s traditional business of conducting borrowing and lending activities. It depends on the 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) – in banking speak, this spread is known as the net interest margin, or NIM.

The NIM for DBS from 2010 to 2015 is also shown in the chart above; in general, the higher the NIM is, the better it could be. It’s worth noting that the net interest income of a bank is also a part of its business that can be heavily affected by the prevailing interest rate environment.

Non-interest income, on the other hand, consists of activities outside of traditional borrowing and lending. In DBS’s case, it involves brokerage services, investment banking services, trade and transaction services, wealth management services, credit card-related activities, and more.

As alluded to earlier, 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.

There are a few moving pieces to DBS’s business. Investors who can break down the revenue streams of the bank would be able to make more informed investing decisions.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.