Examining DBS Group Holdings Ltd’s Sensitivity To Rising Interest Rates

DBS Group Holdings Ltd (SGX: D05) is the largest local bank in Singapore by total assets. At the end of June 2016, DBS had total assets of S$450.9 billion.

For any investor interested in DBS, it is important to know how it is generating revenue from its assets. Knowing how DBS makes its money makes it likelier than investors can assess how changes in market conditions can affect the bank.

We are currently, and have been for some time, in a low interest rate environment. Changes in interest rates can impact banks. In Singapore, the interest rate environment is closely linked to what happens in the US.

Last month, the US’s central bank, the Federal Reserve, had decided to hold rates steady. But, of the 10 voting-members of the Federal Reserve, three had wanted to hike rates. Focus Economics thinks that there will be a 55% chance of an interest rate hike in December this year.

My colleague David Kuo had wrote recently that banks in Singapore (DBS included), are likely to benefit if there is an increase in interest rates in the US. I thought it would be interesting to have a look at how sensitive DBS’s business could be to rising interest rates.

The following chart shows the different revenue sources for DBS in the first-half of 2016:

Source: DBS 2016 second-quarter earnings release

The bank had pulled in S$5.78 billion in revenue in the first-half of 2016. Of that, S$3.67 billion, or 63% of total revenue, came from net interest income. This is the business segment that is dependent on changes in the interest rate environment.

So as you can see, a huge chunk of DBS’s revenue can be swayed by interest rates. But even if interest rates in Singapore do rise and DBS’s net interest income climbs, that’s no guarantee that the bank’s bottom-line will benefit. DBS’s profit is also a function of its ability to manage risk and costs.

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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 Ong Kai Kiat owns shares in DBS Group Holdings.