DBS Group Holdings Ltd (SGX: D05) is a leading financial services group in Asia, with more than 280 branches across 18 markets. The bank offers a full range of banking services for consumers, SMEs (small and medium-sized enterprises), and large corporations.
Investors looking to invest in the bank would be interested to know exactly how the bank makes money, how much dividends it pays out, and its valuation, among other aspects. Without further ado, let’s start a deep dive into DBS.
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How DBS makes money
The bank has four primary business segments, and they are:
1. Consumer Banking/Wealth Management;
2. Institutional Banking;
3. Treasury Markets; and
The Consumer Banking/Wealth Management segment provides customers with a wide range of banking and related financial services. These include current and savings accounts, fixed deposits, loans and home finance, cards, payments, and investment and insurance products. In 2017, this segment accounted for S$4.67 billion of DBS’s total income of S$11.92 billion.
Next, the Institutional Banking segment provides financial services and products to institutional clients, including bank and non-bank financial institutions, government-linked companies, large corporations, and SMEs. The products and services under this segment comprise the full range of credit facilities from short-term working capital funding to specialised lending. It also provides global transactional services. In 2017, the Institutional Banking segment made S$5.28 billion in income.
Treasury Markets is mainly involved with structuring, market-making, and trading across a broad range of treasury products. Last year, this segment brought in S$856 million in income.
Last but not the least, the Others segment deals with capital and balance sheet management, funding, and liquidity, among others. The Islamic Bank of Asia (IB Asia) and DBS’s stock-broking arm (DBS Vickers Securities) are also included in this segment. DBS said in 2015 that IB Asia would be progressively wound down and the process is likely to take two to three years. This segment raked in S$1.12 billion in income in 2017.
In 2017, DBS posted record total income, profit before allowances, and net profit. The slide below explains further:Source: DBS 2017 earnings presentation
Total income grew 4% over 2016 due to broad-based fee income and loan growth, which more than offset the impact of a lower net interest margin and weaker trading performance. For the year, DBS’s cost-to-income ratio was stable at 43% while its return on equity fell to 9.7% from 10.1% in 2016.
Total ordinary dividends from DBS has increased by around 11% per year from S$0.56 per share in 2012 to S$0.93 per share in 2017 (the 2017 amount excludes a special dividend of S$0.50 per share).
Source: S&P Global Market Intelligence
In its 2017 fourth quarter earnings update, DBS explained how its dividends would look like going forward:
“It also determined that ordinary dividends can be sustained at higher levels and affirmed the policy of increasing them over time in line with earnings growth.”
As mentioned by DBS, shareholders can expect to receive higher dividends if the bank’s earnings grows in the years ahead.
For the rest of 2018, DBS has the following outlook:Source: DBS 2018 second-quarter earnings presentation
DBS expects its loan growth to be in the range of 6% to 7%, down from a forecast of 8% growth that was given previously. My Foolish colleague, Jeremy Chia, discussed four macroeconomic headwinds that may impact the bank’s business going forward in a recent article of his.
Current valuation and stock price history
Yesterday, DBS shares closed at a price of S$24.99 each. This price translates to a price-to-book (PB) ratio of 1.36 and a dividend yield of 4.8%. In comparison, on the same day, the SPDR STI ETF (SGX: ES3) had a PB ratio of 1.11 and a distribution yield of 3.5%. The SPDR STI ETF tracks the fundamentals of Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI).
The following chart shows DBS’s share price history for the past five years:
Source: Google Finance
The bank’s share price has risen by 11.5% on an annualised basis from S$16.19 on 6 September 2013 to S$24.99 on 4 September 2018. In recent times, though, the bank’s share price has fallen due to the macroeconomic worries mentioned earlier.
Going forward, if the bank can grow its earnings and dividends in a consistent manner, shareholders should be handsomely rewarded with an increasing share price.
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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 Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.