DBS Group Holdings Ltd (SGX: D05) CEO Piyush Gupta has built a reputation of providing insightful commentary on a wide variety of topics. In DBS’s latest earnings brief, it was no different, with Mr. Gupta once again delivering useful insights. Here are five key things he told analysts.
On the threat of digibanks…
In response to a question on the impact of digibank licenses being issued in Singapore, Mr. Gupta said:
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“On your question relating to digital banks in Singapore, many of their value propositions are related to payments, which are already well covered in Singapore. Some of the fintechs also provide wealth management or lending services. In general, Singapore banks are quite competitive in digital wealth offerings and lending.
In markets where the incumbent banks are less able to digitise and create compelling value propositions, the impact of digital players is likely to be more meaningful. In markets like Singapore, where the banks have spent three to four years changing their own digital capabilities and value propositions, it is not immediately obvious where the gaps are.”
Mr. Gupta also added:
“In Singapore, we have already rebranded our mobile offering as digibank. We are confident about taking on new competition as digibank in Singapore is complete. It addresses almost every market segment and every product category. It fulfills everything instantly, such as money transfers and payments. We also offer financial planning and budgeting tools, wealth management, as well as instant loan and credit card approval. We have a very competitive product compared to any digital bank in the world.”
On net interest margins for the rest of 2019…
Mr. Gupta said:
“If the Fed does a 25-basis-point rate cut tomorrow, our second-quarter NIM of 1.91% might be reduced by about one basis point. If the Fed does another rate cut after that, we expect another one to two-basis-point reduction in the fourth quarter. If there are two cuts in 2019, second half NIM will end up at 1.88-1.89%.
Our full-year NIM will still be close to 1.89- 1.90%, which gives us an increase of about five basis points for the full year. If the Fed does more than two cuts, our NIM may be reduced further. One of the uncertainties is how US rate cuts will translate into Sibor and Hibor movements. We generally assume some pass-through to Sibor and Hibor, but the actual impact could vary.”
As most of us know, the Fed did cut rates by 25 basis points in the meeting the day after DBS’s media briefing. As such, investors should expect reduced net interest margins in the following quarters.
On costs and running the bank sustainably…
Despite global uncertainty, Mr. Gupta believes the bank has been prudent in keeping its costs down and does not foresee any major spending cuts. He said:
“We believe in running the bank for the long term. While we have some flexibility in tightening expenses when there are headwinds, we don’t want to end up doing what a lot of global investment banks do with mass retrenchments and deep restructurings. We’ve been able to run the bank quite sensibly for the past decade by being very thoughtful about how we invest while producing decent returns. We don’t foresee major expense cuts in the short term.”
On challenges over the next two years…
Despite record profits, global economic growth is expected to slow. Here’s what Mr. Gupta said will be the main challenges:
“In a slowing global economy, we won’t be able to sustain our double-digit income growth. Assuming it halves from the 11% we achieved, we will have to evaluate investment and spending plans. Apart from flexibility in expenses, I indicated that we do not see any stress in the portfolio and our conservative provisioning in the past could provide some support to future earnings.”
On the biggest risk to projections…
In response to a query on what were the biggest risks for the rest of the year, Mr. Gupta said:
“The major downside risk is if we have more than two rate cuts, or if the rate cuts are more severe. If the Fed cuts 50 basis points tomorrow instead of 25 basis points, that certainly deviates from our base case assumption, which will be a major headwind to us.”
That said, the Fed cut rates by just 25 basis points in the policy meeting after DBS’s briefing. That allays some of the downside risks mentioned.
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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 Jeremy Chia owns shares in DBS Group Holdings Ltd. The Motley Fool Singapore has recommended the shares of DBS Group Holdings Ltd.