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3 Positive Trends For DBS Group Holdings Ltd’s Business

2017 was a stellar year for DBS Group Holdings Ltd (SGX: D05) as the bank’s full-year profit grew 4% to a record high of S$4.39 billion. The improving oil and gas market, higher interest rates, and improving home loan market were all catalysts for DBS’s improved performance.

Investors are likely wondering whether the bank can improve on its already impressive 2017 results in 2018. Here are three trends I believe make growth for DBS probable.

Growing net interest margin

Rising interest rates will theoretically have a negative impact on most companies that use borrowed money, as they will have to incur more interest expenses. On the other hand, banks, unlike most other companies, thrive when interest rates increase. That’s because banks can capitalise on the higher interest rates to achieve better net interest margins.

The net interest margin is the difference between a bank’s cost of capital, and the interest it charges on the money it lends out (to say, borrowers who need mortgage loans). The chart below illustrates the trend in DBS’s net interest margin going back to the first quarter of 2016.

Source: DBS 2017 fourth quarter earnings presentation

As you can see, DBS’s net interest margin has risen from 1.71% in the fourth quarter of 2016 to 1.78% in the fourth quarter of 2017. With interest rates expected to rise further this year, DBS will likely benefit from a widening of its net interest margin again this year.

In fact, DBS’s CEO, Piyush Gupta, said as much in his 2017 fourth quarter earnings presentation. Gupta commented that he expects DBS’s net interest margin to benefit from the “improving interest rate environment.”

Loan volume growth

One major contributor to DBS’s net interest income growth in 2017 was the increase in loan volume. DBS’s loan volume climbed by S$25 billion, or 9%, during the year (this excludes the S$8 billion contribution from DBS’s acquisition of ANZ).

More importantly, most of that growth was achieved in the second half of 2017, which demonstrates the growing momentum of the loan market. With the recent en-bloc frenzy in Singapore and strong economic conditions, I expect the loan volume for DBS to continue to grow at pace in 2018. DBS’s own forecast is for loan volume growth of between 7% and 8% in 2018.

Track record of growing its fee income

DBS has grown its services businesses (this includes wealth management, investment banking, cards, trade and transaction services, and loan-related services) at an impressive rate over the last few years.

Fee and commission income has grown at a commendable compounded rate of 7% per annum from S$2.27 billion in 2014 to S$2.99 billion in 2017. Fee and commission income now make up around 22% of DBS’s total income. The bank’s track record of growing this sector of its business also bodes well for the future.

The Foolish Conclusion

I believe I’ve showed that there are indeed legitimate reasons to be bullish about DBS’s future. Besides likely growth in its core business of earning interest income, the bank is also well positioned to grow its fee-based services business to contribute to its earnings. Furthermore, with its stellar track record, good standing among Singaporeans, and growing digital banking presence in emerging markets, I believe the future certainly looks bright for the bank.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of DBS Group Holdings. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings.