DBS Group Holdings Ltd (SGX: D05), or DBS for short, is one of the three big banks in Singapore, providing a wide range of financial services to clients. The bank recently released its first quarter 2019 earnings, while my colleague Lawrence also talked about DBS’s planned digital transformation in order for the bank to stay competitive and fend off competition from new technologies.
I would like to add on to the discussion by highlighting two major risks that could potentially pose a threat to the bank’s planned growth initiatives. As investors probably know, any discussion of an investment is not complete without a comprehensive review of the risks involved. So, here are the two risks that spring to mind and which investors should account for when assessing the growth prospects of DBS.
1. US trade tariffs imposed on China
President Donald Trump has just announced his intention to raise tariffs on billions of dollars of imports from China from 10% to 25%. The effect of these tariffs will raise costs across the entire value chain for many categories of products and could cast a shadow over companies’ growth plans.
A direct effect of the tariff imposition could be companies cutting costs and conserving cash, instead of borrowing more for expansion. Time will be needed for the supply chains to absorb the news of the tariff increases and for sellers to adjust prices to compensate for their higher cost of materials and of doing business. The exact impact is still unknown but DBS, being a major lender to Singapore and Asian businesses, could potentially see the growth of its loan book negatively impacted by these tariffs.
2. Virtual banking in Singapore
A recent announcement by the Monetary Authority of Singapore (MAS), Singapore’s central bank, states that it is studying the feasibility of allowing financial technology (fintech) firms to operate digital-only banks in Singapore. This move is in line with what regulators in other Asian countries (e.g. Hong Kong) have done, with some already issuing virtual banking licenses. The MAS needs time to engage stakeholders to determine the value of such virtual banks and also understand how risks can be monitored and contained.
If MAS does decide to issue virtual banking licenses, it could open the floodgates for fintech firms to set up shop in Singapore and challenge the incumbent banks. Virtual banks should have a much lower cost-to-income ratio as they do not operate physical branches or have automated teller machines (ATMs). The main area of concern is that these fintechs would wrestle deposits away from DBS, an essential part of the lending business for banks.
Watch out for next steps
These two risks are looming over the horizon and investors in DBS should sit up and ensure they monitor developments closely, watching out for how the management team at DBS is dealing with or mitigating these threats.
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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 Royston Yang does not own shares in DBS Group Holdings Ltd. The Motley Fool Singapore has recommended shares of DBS Group Holdings Ltd.