DBS Group Holdings Ltd (SGX: D05) is one of the three major banks based out of Singapore, along with United Overseas Bank Ltd and Oversea-Chinese Banking Corp Limited.
In this article, I will look at the business risks of DBS to help us better understand its business. This is important because risks exist in all businesses and one of the aims of a company would be to reduce risks. With that, let’s look at two main risks outlined by DBS and how it plans to manage those risks.
As a financial institution, one of the main risks that it faces is credit risk arising from its lending activities. So, what is the company doing to manage such a risk? Here are some examples.
Firstly, DBS has set out clear policies covering the various dimensions of credit risk and the scope of its application. Senior management sets the overall direction and policy for managing credit risk at the enterprise level.
Next, the bank uses various risk methodologies to manage credit risks. Examples of such tools are statistical models and data analytics, assignment of credit risk ratings and setting of lending limits, and a thorough understanding of corporate customers’ business.
Also, it invests in systems to support risk monitoring and reporting for its various businesses. These systems will keep the bank up to date with the latest information on customers’ credit conditions.
The second risk here is market risk, which is the risk that changes according to market conditions (exchange rate, interest rate, etc) affecting the bank’s operations and financial assets. Here, the bank categorises its market risk exposure into two categories — trading portfolios and non-trading portfolios.
To manage these market risks, the bank uses a variety of financial derivatives such as swaps, forwards and futures, and options for trading and hedging against movements in interest rates, foreign exchange rates, equity prices and other market risks.
Also, it uses Value-at-Risk (VaR) methodology to analyse the potential losses of risk positions as a result of market movement over a specified time horizon and according to a given level of confidence. In addition, the bank will regularly conduct various stress tests on many types of market risks to help it better manage the risk.
The above are two important risks and the risk management strategies outlined by DBS in its latest annual report. Given that risk and risk management are part and parcel of running a company, it is important that investors understand them before investing in any company, including DBS.
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. The Motley Fool Singapore has recommended the stocks of DBS Group Ltd, United Overseas Bank Ltd and Oversea-Chinese Banking Corp Limited.