As the first Singapore Bank to announce earnings, DBS has once again achieved a record performance for the fourth quarter of 2022 and has finished the year on a high note.
In total, net profit grew 20%, boosted by the increase in interest rate.
The same question now comes into all investors’ minds, is it time to buy, sell or hold?
I hope this article offers you an in-depth assessment of your investment in DBS and the other two local banks, UOB and OCBC, which will only be released in another week.
So, let’s get started.
Record earnings for FY2022
As aforementioned, DBS reported record earnings. This was mostly attributed to an increase in interest rates, which increased net interest income far more than the reduction in non-interest income caused by financial market volatility.
Net interest income, which is the difference between what the bank makes from lending money, has increased by 40%.
This was significant in contrast to the 12% loss in fee income in 2022, which encompassed investment product sales and investment banking fees, all of which had decreased substantially to the sluggish capital market.
Slowing growth
Year over year, the fourth quarter net profit reached a record $2.34 billion, representing a 69% jump with a 17.2% return on equity, a new quarterly high.
Nevertheless, we need also to consider the growth rate on quarter to quarter basis, which only increased by 5%. Granted that the fourth quarter normally sees reduced income, this could be an indication that growth is waning.
Indeed, looking at loan growth, we are beginning to observe a slowdown as corporates switched their borrowing to cheaper financing options or repaid opportunistic borrowing while wealth management customers cut margin loans.
Consequently, we should expect a similarly sharp increase in annual profit but a relatively flat or slower growth in quarterly earnings at OCBC and UOB.
Balance sheet remains strong
DBS’s balance sheet remains as robust as it has ever been, if not stronger. Non-performing assets decreased 8% year on year to SGD 5.13 billion, while the NPL ratio improved from 1.2% to 1.1%.
Another indicator is its Common Equity Tier-1 ratio, which increased 0.8 percentage points from the previous quarter to 14.6%, which is considerably higher than the regulatory requirement.
Overall, the bank is adequately capitalized, and even if the economy were to enter a recession this year, it would definitely survive.
DBS Dividends
Another announcement was the dividend, which made shareholders quite thrilled. Given the improved earnings, the board has announced a final dividend of 42 cents per share, a 6 cent increase over the previous payout.
In addition, shareholders will receive another special dividend of 50 cents per share, bringing the total distribution for FY2022 to $2 per share.
UOB and OCBC, which pay dividends twice a year, will pay some dividends in the next earnings announcements. Will they also raise their dividend and pay a special dividend?
That is anyone’s guess, however, I feel a raise in dividends is highly likely. Nonetheless, based on the share prices of these banks, which have remained relatively stable or even decreasing since DBS announced its dividend, I believe this news has already been priced in.
It is time to buy?
Now that you have seen the bank’s spectacular performance, is it time to buy?
Well, before you make your decision, consider the following points.
For starters, 2022 was a terrific year for the bank due to increasing interest rates. Moving forward however, bank profits are projected to diminish in the future as the cycle peaks and economic growth slows.
This was also stated at a press conference by DBS Chief Executive Piyush Gupta, who mentioned that interest rate increases in the United States are expected to moderate, but unlikely to see a rate reduction this year. Using this case, while growth will continue, we should not expect to see the same results as in 2022.
This applies to all banks, not only DBS, and should be considered before making an investment decision.
Another issue to consider, particularly for DBS, is its $1 billion exposure to the Adani Group. DBS was one of several banks that helped Adani fund its $10.5 billion acquisition of Holcim’s cement division in India last year. Recently, Hindenburg Research, a US short seller, has accused the Indian giant of accounting fraud and stock manipulation.
If you’re unfamiliar, Hindenburg Research is widely followed, and companies that it mentions typically see their shares plummet. Indeed, Adani Group’s listed firms’ valuations have been slashed by $110 billion since then.
Fortunately, DBS may not have much negative impact since three-quarters of the exposure is to acquisition financings of the cement company, where the cash flows are ringfenced.
Nonetheless, what we can take away from this is that as DBS attempts to diversify, as seen by its acquisition of a distressed Indian bank in 2020, investors would be exposed to greater risk than previously.
There is obviously a strategic rationale here, and if all goes well, DBS might benefit from the burgeoning markets of China and India. However, if it doesn’t, then at least you should have known about it before investing.
Conclusion
DBS has once again exceeded shareholder expectations. With interest rates expected to remain high for the foreseeable future, DBS earnings are expected to remain stable, albeit with slower growth.
Nonetheless, investors should be aware of the increased risk associated with investing in DBS. While the company has long been considered a blue chip stock, increasing investment in riskier assets as it attempts to diversify its revenues may be unsettling to some; as such, you should consider whether you are okay with it.
On the plus side, the reopening of China may provide some solace, as it accounts for over a quarter of the group’s earnings. With the reopening, we should expect to see the country’s economy improve and possibly witness an increase in revenue from China.
Who knows, we might get another surprise.
