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3 Key Things I Learnt about DBS Group Holdings Ltd’s Business Growth From its 2018 Annual Report

DBS Group Holdings Ltd (SGX: D05) achieved another record performance in 2018 as net profit increased 28% from the previous year. Total income was 11% higher, largely due to higher net interest income and fee income. Perhaps the greatest achievement for the bank was generating a return on equity of 12.1% for the year, the highest seen since 2007. The feat is made even more impressive with the stricter capital requirements facing DBS today.

Besides the impressive headline numbers, DBS ‘s annual report for 2018 – released last week – also brought to light many interesting developments in the bank. Here are three factors that could affect the bank’s business growth. charts from the report that really caught my eye.

Trade war risk

One of the major concerns DBS’s shareholders may have is the impact of the ongoing and possibly escalating trade war between the US and China. However, DBS’s CEO, Piyush Gupta appears to be more optimistic than most.

He believes that the impact on China is not as severe as many financial markets commentators have suggested. In DBS’s latest annual report, he shared that the proportion of net trade to GDP (gross domestic product) in China has been shrinking, and within that, trade with the United States accounted for only about 19% of China’s exports in 2017. In addition, he believes that it is difficult to shift many supply chains away from China, in the short term at least.

Gupta said too that he believes that shifts in new investment capacity to alternative locations will most likely remain in the region and such shifts could be at least neutral, if not even positive, for DBS. He explained:

I also believe that any shifts that eventually happen are likely to be within the region, reflecting the reality that Asia is both a production centre as well as a market place. Our customers frequently cite Thailand, Vietnam, Philippines, and India as potential beneficiaries of longer-term shifts. Such shifts are likely to be at least neutral for DBS’ business, if not somewhat positive.”

Nevertheless, Gupta did warn that there could be potential larger concerns that investors should be wary about. He said:

“However, even if there is an agreement, it would hide a couple of larger concerns. (a) The shift from a multilateral trading regime based on WTO, TPP and such- like is generally not good for a stable rules-based order. Bilateral arrangements create arbitrage windows and are difficult to monitor and execute. This will create ongoing friction in trade flows. (b) The more disconcerting worry is thatUS-China tensions extend beyond trade and are really a manifestation of the Thucydides trap. This would create ongoing geopolitical tensions and a new set of challenges in a region that has benefitted from geopolitical stability over several decades.

In the extreme, one could imagine a technology-led iron curtain between China and the US, forcing smaller Asian countries to choose sides. This would be extremely damaging for the region. We should avoid the possibility of a new cold war at all costs.”

Credit risk

DBS has done well to grow its loans portfolio while being mindful of credit risks. Besides the escalation of the US-China trade war, 2018 also saw China’s ongoing deleveraging of its corporate sector, the increased pace of US interest rate hikes, and the depreciation of some emerging market currencies. The bank’s chief risk officer, Tan Teck Leng, commented:

“As a consequence of the growing headwinds, we heightened vigilance over our credit portfolio. We also conducted thematic portfolio reviews based on the risks that had emerged in the second half of 2018. These included detailed analyses of our China, India and Indonesia exposures. We grew our overall portfolio by 7% during the year and while idiosyncratic risks cannot be completely eliminated, we remain comfortable with its quality. Our portfolio is diversified across industry and business segments, with more than 70% of corporate and institutional exposure to investment-grade borrowers.”

In addition, the real estate market in Singapore saw additional property cooling measures in July 2018 that resulted in weaker market sentiment. However, Tan believes that the quality of DBS’s property-loan portfolio remains strong with an average loan-to-value ratio of less than 60%. In Hong Kong, the bank’s loans remain well collateralised with approximately 90% of loans there having loan-to-value ratios of under 50%.

Growing digital presence

Finally, DBS has been at the forefront of digitalisation for many years now. In July 2018, the bank was crowned World’s Best Digital Bank by Euromoney for the second time in three years. In 2018, the bank made further progress on its digital efforts.

As of end-2018, 80% of DBS’s open systems were cloud-ready as compared to 66% in 2017. DBS’s cloud-native applications have also nearly doubled to more than 60.

In their letter to shareholders, Gupta and DBS’s chairman Peter Seah said:

“With the pervasiveness of digital, tech is business and business is tech. Recognising this, we no longer view technology as a support function. Instead, we have organised ourselves such that business and technology teams are now co-drivers in 33 platforms, and work together to deliver on shared goals and key performance indicators. On the data front, we have established an analytics centre of excellence, trained over 10,000 of our people on a data-driven curriculum, and developed a framework on responsible data usage.”

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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.