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DBS Group Holdings Ltd’s 2018 Earnings: Record Year With Continued Growth Expected in 2019

DBS Group Holdings Ltd (SGX: D05) achieved another good quarter to end 2018 as net profit rose 8% from a year ago on the back of higher net interest income. For the full year, net profit was 28% to S$5.6 billion, a record high. Most notably, return on equity for the full year rose by more than two percentage points to 12.1%, the highest since 2007.

Here are the most important takeaways from its fourth quarter and full year results.

The numbers

Fourth quarter:

  • Total income increased 6% to S$3.2 billion
  • Profit before allowances was up 3% to S$1.7 billion
  • Allowances declined 9%
  • Net profit increased 8% to S$1.3 billion

Full year:

  • Total income rose 11% to a record S$13.2 billion
  • Profit before allowances up 9% to a record S$7.4 billion
  • Net profit up 28% to S$5.6 billion

What’s behind these numbers

In the fourth quarter, net interest income rose 11% to S$2.3 billion, due to both loan volume growth and higher net interest margin. However, non-interest income fell 4% due to declines in investment banking, wealth management, and brokerage fees.

That said, on a quarter-on-quarter basis, fourth-quarter net profit was actually 7% lower than the previous quarter. The decline was mostly due to weakened treasury market, which fell 60%.

On a full-year basis, the record net profit was due to higher net interest income, non-interest income, and lower allowances compared to a year ago. The consolidation on retail and wealth management business of ANZ also contributed to higher fee and interest income.

By business unit, consumer banking and wealth management rose 21%, while institutional banking grew 9%. The only blotch was again treasury market income which declined 21% for the full year.

Higher net interest income driving growth

Net interest income was the main driving force behind the strong numbers this year. Net interest income increased 15% from a year ago, compared to net fee and commission income which grew 6%.

The higher net interest income was due to the widening of the net interest margin and higher loan volume. The chart below shows the net interest margin over the course of the last two years.

Source: DBS Group Holdings 2018 Q4 Results CFO Presentation

In 2018, there was a steady rise in net interest margin, in line with the Fed rate hikes last year. However, with the Fed’s more hawkish stance this year, net interest margin rates this year are unlikely to rise as fast. 

Also, loan volumes increased 6% this year or S$21 billion, led by non-trade corporate and consumer loans. In the fourth quarter, loans rose S$5 billion or 2% from the previous quarter.

Fee income up

Fee income in 2018 continued its strong growth trajectory, rising 8.5% from a year ago. Fourth quarter fee income inched up 3% from a year ago. The chart below breaks down the bank’s fee income each quarter over the past two years.

Source: DBS Group Holdings 2018 Q4 Results CFO Presentation

The chart shows strong growth in wealth management, transaction services, and card fees earned in 2018.

Strong balance sheet

Impressively, DBS has negotiated its loan volume growth without weakening its balance sheet. Its allowance coverage was 98% (a ratio close to or above 100% is desirable). Deposits increased 2% sequentially in the fourth quarter and 5% from a year ago in constant currency terms, giving the bank a larger platform to increase its loan volume.

The common equity tier 1 ratio, a commonly used metric to measure the liquidity of a bank, increased by 0.6 percentage points to 13.9%, well above the regulatory minimum of 6.5%.

Dividends and looking ahead

The board has proposed a final dividend of 60 cents per share that will bring the payout to S$1.20 per share for the full year. Based on its full-year earnings per share of S$2.15, the bank has a dividend payout ratio of 0.56.

In his presentation to analysts, DBS chief executive Piyush Gupta said that he expects the bank to have mid-single digit loan growth and continued net interest margin progression in 2019, with high single-digit income growth this year. Despite reaching a decade high return on equity (ROE), he still expects continued ROE improvement this year.

He added:

“We achieved financial results befitting our fiftieth anniversary, a year when we were recognised as the world’s best bank and best digital bank. Return on equity of 12.1% was near the historical high of 2007 when interest rates were twice the levels today and capital requirements less stringent. The structural improvements we have made to the profitability of our franchise – a shift towards higher returns business, deeper customer relationships and more nimble execution – put us in good stead to navigate the challenges of the coming year.”

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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.