In his address during DBS Group Holdings Ltd (SGX: D05) second-quarter earnings update, CEO Piyush Gupta highlighted four macroeconomic uncertainties that may impact DBS’ business going forward. Here’s a quick summary on what he said.
Rising US-China trade tensions
Predictably, the first thing he talked about was the US-China trade tensions. As we all know by now, the US-China trade tensions have been escalating in recent weeks. In July, the United States imposed the first 10% tariff on US$34 billion worth on Chinese imports. China retaliated in kind – almost immediately.
Neither country wants to back down, and US President Trump is already preparing to slap another tariff on US$200 billion worth of imports.
Gupta said that the first batch of trade tariffs has had almost zero impact so far. He says that most of the trade goods affected were manufacturing components. As it is difficult for US importers to “switch the supply chain”, the trade tariffs will likely impact consumers and manufacturers and have little impact on trade flows.
However, he said the next phase of the trade tariffs is “less certain” because it will impact finished goods. Gupta, however, does not expect considerable shifts in trading patterns due to the sheer size of the imports, making it difficult for US importers to find alternative sources.
What he feels would be the biggest impact is not the change in trading flows, but instead the effect it will have on business and investor confidence. This will, in turn, impact equity market and credit spreads, which he believes might have an impact on DBS’ treasury markets business.
Still in China, Gupta highlighted that China has been trying to deleverage, which might lead to privately-owned enterprises encountering liquidity issues.
He mentioned that in the first half of 2018 alone, he saw 22 defaults. He warned that DBS needs to be very careful with whom it deals with and the counterparties involved, keeping in mind the impact of deleveraging in the medium term.
Weakening Asian currencies
The Indian rupee and Indonesian rupiah have weakened in recent times. However, DBS has not seen much impact from the weakened currency. The economies in the two countries are still growing at pace, and Gupta believes the central banks of the countries will continue to monitor and control the currency values.
On the other hand, he did warn if these currencies do continue to devalue, there might be more stress on the economies affected. DBS, will, therefore, keep a close eye on how things unfold.
Singapore property cooling measures
There are two main impacts that Gupta sees from the recent additional property cooling measures. For one, he sees loan growth in the consumer home loan market slowing down. DBS originally anticipated adding S$4 billion to the consumer mortgage book, but with the impact of the property cooling measures, it expects the growth to be cut by around S$0.5 billion.
The other impact is on property developers. The higher stamp duty on developers will decrease the return on investment on projects, which in turn could lower the number of residential property developments in Singapore.
The Foolish bottom line
The four macroeconomic headwinds mentioned above could hamper DBS’ growth in the future.
That being said, there is one big positive that Gupta highlighted in his presentation, and that is, the strong US economy. He believes that the sheer pace of the US economic growth and its soaring consumer market can help mitigate all the negative impacts from the other headwinds. The rising interest rate environment will also continue to increase the bank’s interest income over the next few quarters.
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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 a recommendation on DBS Group Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.