[November.2024] Understanding earnings of DBS, one of Singapore's top-valued bank stock

$DBS Group Holdings (D05.SG)$ , Singapore's market giant, would undoubtedly top any list of the country's most closely watched stocks, thanks to its impressive market capitalization and active trading volume. With its share price tripling since late 2011, DBS has significantly outperformed the FTSE Straits Times Index, boasting a steady 9.6% annual growth rate over 12 years.

Looking ahead, the question is whether DBS can sustain its stellar track record. Insights into its potential lie within its financial reports. Each earnings release may signal a potential investment opportunity, but before diving in, investors need to understand how to interpret their financial statements.

So, how should we evaluate DBS's financial report? We can focus on three key aspects: performance growth, risk indicators, and shareholder returns.

1. Earnings Growth Trend

Let's first examine DBS's earnings growth. Revenue growth has been volatile, with a decline after 2018, but it has seen consecutive increases in the past two years since 2022.

Except for a significant drop in 2020 due to the pandemic, net income has been stable since 2021, reaching historical highs each year.

DBS's revenue primarily consists of net interest income and non-interest income. In 2023, net interest income accounted for about 67.8%, with the remaining less than one-third coming from non-interest income.

Therefore, fluctuations in net interest income are key to DBS's performance. Net interest income is the bank's interest earnings from loans minus the cost of savings deposits.

This income is mainly related to two indicators: the scale of deposits and loans, and the net interest margin, which is the difference between loan and deposit rates.

The larger the scale of deposits and loans, the more interest the bank earns. From Q4 2022 to Q4 2023, DBS's loan scale has remained around S$416 billion, with deposit levels fluctuating slightly around S$570 billion, showing little overall change. In Q2 2024, DBS saw an increase in both deposits and loans, reaching new highs in recent quarters.

The second indicator, net interest margin, has been increasing with Singapore's rising interest rates since the fourth quarter of 2022, from 2.61% to 2.82% in Q3 2023. However, in Q4 2023, as deposit costs also began to rise, DBS's net interest margin slipped to 2.75%, leading to a quarter-over-quarter decline in net interest income. In Q1 and Q2 2024, DBS's net interest margin rebounded.

Looking ahead, we should continue to monitor whether DBS can maintain its loan and deposit scale expansion and whether the increase in net interest margin will persist, as these will be crucial in determining the pace of revenue growth.

If the momentum in DBS's earnings growth stalls in the next few years, it could also put pressure on the stock price.

2. Risk indicators

At its core, a bank's business model is about earning interest margins—paying low interest to attract depositors' funds and lending at higher rates. Consequently, banks have relatively little equity compared to their total assets, resulting in a high leverage ratio. For instance, DBS has a debt-to-asset ratio of 91.6%.

High leverage in banking brings potential risks, and since banks are a cornerstone of the financial system, widespread bank failures can destabilize the entire market. Therefore, regulatory bodies have set stringent financial requirements for banks.

A key metric is the Common Equity Tier 1 (CET1) Capital Ratio, a critical indicator of a bank's financial robustness, measuring the proportion of a bank's core capital (common equity plus retained earnings) to its risk-weighted assets. This regulatory benchmark is set by the Basel Committee on Banking Supervision, with a minimum requirement of around 4.5%. Additionally, different countries may impose extra capital buffer mandates, but generally, they do not exceed 11%.

DBS's CET1 Capital Ratio stood at approximately 14.8% at the end of Q2 2024, significantly above the Basel III requirements and surpassing the regulatory thresholds of other jurisdictions.

The second indicator is the non-performing loan (NPL) ratio, which represents the proportion of non-performing loans to the total loan portfolio and serves as a measure of loan asset quality. Loans that are overdue for more than 90 days are usually classified as non-performing. A higher ratio indicates more potential bad debt and greater potential losses for the bank. As of the end of Q2 2024, DBS's NPL ratio was around 1.1%, slightly above the 1% threshold, indicating relatively high loan quality.

The third indicator is the loan loss provision coverage ratio, which is the proportion of funds set aside by a bank for non-performing loans relative to the amount of those loans. This ratio reflects the bank's coverage for potential losses—the higher the ratio, the more seriously the bank considers potential loan loss risks and the more robust its operations. DBS had a coverage ratio of approximately 129% at the end of Q2 2024, suggesting a substantial reserve for potential loan losses and overall stability.

In future financial reports, it will be important to continue monitoring DBS's performance on critical risk indicators such as the CET1 capital ratio, NPL ratio, and provision coverage ratio to ensure it maintains its financial solidity. Any adverse trends in these indicators would merit closer attention.

3. Shareholder returns

Many stable banks, known for their generous dividends, are favored by investors as dividend stocks. Dividend payouts signal a company's commitment to its shareholders and are highly valued by the investment community.

Dividend yield, the ratio of dividend payments to the company's market value, is an important indicator of dividend value. A higher yield suggests better potential returns if the share price remains constant. However, considering stock price volatility is crucial before investing in high-dividend companies.

DBS has a track record of consistent yearly dividends since 2010, showing a commitment to shareholder returns. Over the past 14 years, DBS has paid out nearly S$34.9 billion in dividends, which is roughly 50% of its net income of about S$71 billion during the same period. This payout ratio reflects a balanced approach to rewarding shareholders and reinvesting in the company's growth.

Regarding the dividend yield, as of mid-April 2024, DBS's dividend yield is around 5%, which may be a fairly substantial figure. Coupled with the favorable stock price performance in recent years, the historical shareholder experience with DBS may have been quite positive.

Summary

When analyzing DBS's financial reports, we can focus on three key areas: earnings growth, risk indicators, and shareholder returns.

DBS has seen consecutive revenue and profit growth over the past two years. However, with net interest margin growth stalling, there's pressure on earnings growth.

Regarding risk indicators, DBS maintains robust levels in its core capital adequacy ratio, non-performing loan ratio, and loan loss provision coverage ratio.

In terms of shareholder returns, DBS has historically demonstrated a shareholder-friendly approach through consistent dividends and attractive dividend yields.