DBS Group Holdings Ltd (SGX: D05), or DBS for short, is one of the three major banks based out of Singapore.
The bank’s shares are currently out of favor among investors. At its current price of S$26.03 (at the time of writing), DBS Group’s share price is down by around 17% from its intraday peak of S$31.28 last seen in May this year.
Despite the decline in share price, there are many reasons why DBS might be a good investment for investors. I discussed the first three reasons in a previous article. As a quick recap, those reasons were:
1) A good track record of profitability;
2) A positive quarterly earnings update;
3) A good dividend track record.
In this article, I will continue with the final two reasons.
Conservative capital adequacy ratio
Capital requirement (also known as capital adequacy) is the amount of capital a bank has to hold as required by its regulator. Capital requirements are set to ensure that banks will not become insolvent during difficult economic conditions.
For investors, the capital adequacy ratio is a good indicator of whether a bank is operating in a conservative manner. In general, the higher the capital adequacy ratio, the more conservative a bank is in conducting its business.
I think DBS has a conservative capital adequacy ratio. As of 30 June 2018, its Common Equity Tier 1 capital adequacy ratio (CAR), Tier 1 CAR and Total CAR were 13.6%, 14.4% and 16.2% respectively. These ratios were well above the regulatory requirements of 6.5%, 8% and 10%.
Last but not least, the recent decline in DBS’s share price means that the bank has a decent valuation.
At S$26.03, DBS is trading at price-to-book (PB) ratio, price-to-earnings (PE) ratio, and dividend yield of 1.4 times, 13.6 times and 4.6%, respectively. Comparatively, the market’s PB ratio, PE ratio, and dividend yield are at 1.1 times, 11.2 times and 3.5%. I am using the SPDR STI ETF (SGX: ES3) as a proxy for the market; the SPDR STI ETF is an exchange-traded fund (ETF) that tracks the fundamentals of Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI).
A Foolish conclusion
In sum, I think DBS will make a good investment over the long run due to its good track record of performance, stable dividend payments, conservative capital positions, and reasonable valuation.
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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. Motley Fool has a recommendation for DBS Group Holdings Ltd.