DBS Group Holdings (D05-SG)

TOP CONTRIBUTORS

Vincent Jow

Geoffrey Jordan

DBS Group (SIN: D05) is the largest commercial banking group in Southeast Asia in terms of total consolidated assets of S$256 billion (U.S. $181 billion) in 2009. DBS provides retail, commercial, and investment banking services in 16 different markets, mostly in Asia. Singapore and Hong Kong are its primary markets, contributing 57% and 22% of its net profit in 2009. The Singapore Government, through Temasek Holdings, owns 27.6% of DBS. In 2009, DBS’s revenues were up 9% to S$6.6 billion (U.S. $4.67 billion).^[1]

The 2008 financial crisis weakened DBS’s financial performance, causing its 2008 profit to decline 18% to S$1.9 billion (U.S. $1.35 billion) from S$2.2 billion the year before.^[2] At the start of the crisis, DBS had an exposure of S$2.4 billion (US$1.7 billion) to the U.S. mortgage market in 2008-2009 through collateralized debt obligations (CDOs).^[3] The high-exposure to CDOs cost the bank S$240 million (U.S. $170 million) in write-downs in Q4 2008.^[3] In addition, the Lehman Brothers bankruptcy caused the default of various credit-linked structured notes. DBS lost S$103 million (U.S. $73 million) as these notes linked to Lehman Brothers became worthless.^[4] Furthermore, as market activities declined, financial market fee income, which includes stock-broking, investment banking, fund and wealth management, fell from S$713 million in 2007 to S$411 million (US$290 million) in 2008.^[1]

DBS has a total of S$1.8 billion of debt exposure in Dubai.^[5] In particular, DBS has a S$788 million (US$558 million) loan to Dubai World, a state-owned investment company that manages a portfolio of businesses for the Dubai government. In November 2009, Dubai World asked lenders to agree to a standstill on its U.S. $59 billion debt to restructure U.S. $22 billion in debt repayments. DBS has classified its loan to Dubai World as a non-performing loan and took S$384 million (US$271 million) in bad debt charges in Q4 2009. Overall non-performing loans jumped 43% from S$268 million a year earlier.^[6]

Company Overview

DBS Group Holdings Ltd. is an investment holding company that operates through its main subsidiary, DBS Bank Ltd. DBS Group provides retail, small and medium-sized enterprise, corporate, and investment banking services. The Company's financial businesses are organized into five sectors: Consumer Banking, Institutional Banking, Global Financial Markets, Central Treasury Unit, and Central Operations.

DBS Bank provides financial services and products to its customers in Singapore, Hong Kong, China, India, Indonesia, Malaysia, The Philippines, and Thailand. DBS derives most of its revenues from consumer and commercial loans and deposits. Profits are determined by the size of loans and current market interest rates.

DBS operates primarily in Singapore and Hong Kong. In Singapore, DBS operates the brands DBS and POSB and has 80 branches and 930 ATMs. DBS also provides mortgage loans and offers Visa and American Express credit cards. In Hong Kong, DBS has an extensive branch and ATM network, operating more than 50 branches and over 70 ATMs.

DBS has also begun to make headway into other markets, following DBS’s CEO Piyush Gupta’s plan to decrease reliance on Singapore and Hong Kong and expand into other markets.^[6] In 2007, DBS became the first Singapore bank to incorporate in China where it operates 7 branches and 6 sub-branches. In 2008, DBS acquired some of Taiwan's Bowa Bank’s assets and opened 40 outlets in Taiwan. In India, DBS has 10 branches in cities like Mumbai and Delhi. In Indonesia, PT Bank DBS Indonesia, a 99%-owned subsidiary, has 40 branches in 11 cities. In 2008, DBS opened a representative office in Vietnam and Dubai.

DBS owns 52 subsidiaries, participates in 2 joint ventures including a 40% holding Ayala DBS holding in the Philippines and its 37.5% holding in India's Cholamandalam DBS Finance. It also maintains a significant stake (20%+) in 8 various banks, including a 20% share in Philippines second largest bank, the Bank of the Philippine Islands.^[7]

Business and Financial Metrics

Second Quarter 2010 Results^[8]

During the second quarter, DBS Group Holdings recorded net earnings of S$718 million, before a goodwill impairment charge of S$1.02 billion for DBS Hong Kong Limited. The earnings before the one-time charge were up 30% from a year ago and 35% from the previous quarter.

Net interest income remained stable at S$1.07 billion. DBS utilised its capital and liquidity position to support customers’ financing needs as regional economic conditions strengthened. Loans expanded 9% from the previous quarter from broad-based regional corporate loan demand and from housing loan drawdowns in Singapore and Hong Kong. DBS was also active in supporting corporate customers’ financing needs through bond issues.

Net interest margins declined nine basis points from the previous quarter to 1.84%. More than half of the margin decline was due to a shift in the securities portfolio towards higher-quality issues with lower yields. In addition, deposit costs were higher due to competition for USD and HKD funding.

Non-interest income rose 16% from the previous quarter to S$748 million. Fee income increased 5% to S$358 million. Wealth management fees benefited from increased product sales while credit card revenues increased with higher transaction volumes. Loan syndication fees remained at the previous quarter’s strong levels.

Trading income grew 21% from the previous quarter to S$278 million. The rise was driven by customer revenues, which grew 45% and accounted for more than half of total trading income. Investment gains doubled to S$98 million as there were increased opportunities for profit-taking of debt securities.

Business Segments

DBS's businesses are organized into five segments: Consumer Banking, Institutional Banking, Global Financial Markets, Central Treasury Unit, and Central Operations.

Consumer Banking (22.57% of Net Profit)^[2]

Consumer Banking provides individual customers with a range of banking and related financial services. The products and services available to customers include current and savings accounts, fixed deposits, loans and home finance, cards, payments, investment and insurance products.

With the largest single-bank network in Singapore, DBS provides credit cards, loans, investment & trust units, insurance, priority and private banking to individuals. DBS also provides consumer banking products to Hong Kong, China, India, Indonesia, Malaysia, The Philippines, and Thailand.

Institutional Banking (58.66% of Net Profit)^[2]

Institutional Banking provides financial services and products to large corporate, institutional clients, and small and medium-sized businesses. The products and services available to customers include corporate finance and advisory banking services for mergers and acquisitions, capital raising through debt and equity markets, capital restructuring, syndicated finance, securities and fiduciary services, cash management and trade services, private equity and credit facilities (overdraft, factoring/accounts receivable purchase, commercial/industrial property financing, hire purchase and government financing and assistance schemes), deposit, and treasury products.

Global Financial Markets (16.83% of Net Profit)^[2]

Global Financial Markets provides treasury services to corporations, institutional and private investors, financial institutions, and other market participants. It is primarily involved in market making, structuring, equity and debt sales, and trading across a range of financial products, including foreign exchange, interest rate/credit/equity, and other structured derivatives. Global Financial Markets also provides equity services, through DBS Vickers Securities (DBSV). DBSV offers a range of services to retail and corporate customers, including research, sales and trading, share placement, nominees and securities custodian services, and distribution of primary and secondary issues.

Central Treasury and Central Operations (17.70% and -15.76%, respectively)^[2]

The Central Treasury Unit is responsible for the management of the Company's asset and liability interest rate positions. It also manages the investment of the Company's excess liquidity and shareholders’ funds.

Central Operations encompasses a range of activities resulting from central corporate decisions and the related income and expenses not attributed to business segments. These include funding costs of the Group’s associates, joint ventures and subsidiaries and gains/losses on properties. Private banking activities and asset management activities are included in this segment.

Geographical Segments

Singapore (65.69% of Net Profit) ^[2]

DBS serves over 4 million customers in Singapore under the POSB and DBS brand name. Loan and deposit volumes in Singapore grew by 33% in Singapore, increasing the net interest income by 6%. Non-interest income declined 34% due to the weak financial markets, bringing down fee and trading activities. Losses from ROSA and Lehman-exposed products brought Singapore’s net profit down 18% to S$1,344.^[2]

Hong Kong (19.06% of Net Profit) ^[2]

DBS serves 1 million retail customers in Hong Kong. DBS also targets the small and midsize businesses, with leading market shares in equipment and trade finance. During 2008, lower interest margins and the appreciation of the Singapore Dollar against the Hong Kong dollar by 6% brought net interest income down by 18%. In addition, prime rates fell faster than cost of funds. Non-interest income also declined by 3% as DBS received less in financial activity fees as market activities slowed.^[2]

Rest of Greater China (5.1% of Net Profit) ^[2]

DBS was the first South East Asian bank to receive approval to incorporate locally in China. In May 2007, DBS established DBS Bank (China). This local incorporation allowed DBS to compete with domestic banks in retail services by offering its customers Yuan-denominated products. Although it is able to grow organically, DBS is also focused on growing in the greater China region through acquisitions or strategic alliances. In 2008, DBS China acquired certain assets of BOWA Commercial Bank, including 38 branches in Taiwan. DBS aims to have the China region contribute 9% of the Group’s profits by 2012.^[10] To tap into China’s vast pool of capital, DBS has commenced talks with Chinese regulators about a eventual listing on the Chinese stock exchange.^[10] Profits in China increased from S$64 million to S$104 million.^[2]

South, Southeast Asia and Others (10.65% of Net Profit) ^[2]

DBS operates globally, with a presence in Malaysia, Indonesia, Thailand, Korea, Philippines, India, Taiwan, the United States of America and the United Kingdom. The net profit of this region increased 113% from S$102 million to S$218 million in 2008. In February 2009, CEO Gupta outlined plans to shift the bank’s focus from Singapore to Southeast and South Asia and the Greater China region. In 5 years, the Greater China region and the Southeast and South Asia region are planned to account for 30% of the revenues each and Singapore’s share is planned to drop from 60% to 40%.^[6]

In 2006, DBS was the first Singapore-based bank to receive a banking license in Dubai.^[11] In 2007, DBS established the Islamic Bank of Asia. In 2008, DBS received approval from the Reserve Bank of India to establish eight more branches. In February 2009, DBS got approval to open a branch in Ho Chi Minh City and plans to increase Indonesian outlets from 40 to 100 in three years.

Trends and Forces

Regulatory changes following the 2008 Financial Crisis

The Monetary Authority of Singapore (MAS) is Singapore’s central bank and regulates statutes pertaining to the financial sector. Following the 2008 Financial Crisis, the MAS has been given enhanced powers in relation to distressed or insolvent banks. In July 2009, MAS banned DBS and 9 other banks from selling structured products in Singapore after they sold S$520 million now-worthless Lehman Brother notes to nearly 10,000 retail investors.^[12] In February 2010, the ban was lifted on DBS Bank, Malayan Banking, and RBS.^[13]

Furthermore, in response to the 2008 Financial Crisis, in January 2009, Securities and Futures (Amendment) Bill 2009 and Financial Advisors (Amendment) Bill 2009 were passed. These changes allowed the MAS regulatory flexibility to exclude certain products and other safeguards. As of February 2009, MAS requires banks to maintain a minimum of Tier 1 ratio of 6% and 10% of total capital ratio. Although the current regulations are in line with international standards, MAS is considering raising the capital ratios.^[14] DBS had a Tier 1 ratio of 13.1% and a total capital adequacy ratio of 16.7% at the end of 4Q2009.^[1]

Dubai World’s Debt Standstill

On November 25, 2009, Dubai World, a government-owned conglomerate, asked all providers of financing to ‘stand still’ and extend maturities until at least 20 May 2010. Even after a $10 billion bailout from neighboring Abu Dhabi, Dubai World has U.S. $59 billion in debt, a large portion of Dubai’s U.S. $80 billion total debt. In February 2009, it asked creditors for a standstill on U.S. $22 billion in debt until it completes restructuring, which may require 6 months.^[15]

DBS’s total exposure to Dubai is S$1.8 billion (U.S. $1.28 billion). The entire credit that is captured under the standstill notice is a S$558 million (U.S. $400 million) bilateral loan to Dubai World. The other S$1.24 billion is in other Dubai-owned companies that are sound and collateralized, such as Labroy and South Beach. In Q4 2009, DBS took S$384 million in bad debt charges and classified its loan to Dubai World as a non-performing loan.^[16]

Asia's Real Estate Bubble

There is a threat of an Asian property market bubble due to government stimulus plans. During the financial crisis, Asian governments spent over U.S. $950 billion to stimulate their economies. Many markets in Asia including Singapore, Malaysia, and China have seen property prices rise. Low interest rates for both lending and deposits are fueling demand in the housing market. The Hong Kong, Singapore, and Korean governments are concerned by the rising prices and have taken steps to curb inflationary pressures. Another bubble in the Asian region could dent recovering markets and lead to another recession.^[17]

Competition

DBS’s major competitors include OCBC, UOB, and Maybank. In addition to Singapore and regional banks, DBS competes with global retail banks such as UBS, Citigroup, HSBC Holdings, and Standard Chartered Bank.

• UOB is second to DBS in terms of loans and deposits in Singapore. Like DBS, it provides and derives most of its profits from its comprehensive commercial and personal financial services in Singapore. It also operates and competes with DBS in Indonesia, Malaysia, Thailand, China and Philippines. UOB also seeks to expand into the Chinese market, incorporating its Chinese subsidiary bank in 2007. In addition, in 2008, UOB acquired a 15% stake of China’s Evergrowing Bank, a company that is 27% owned by DBS.^[19]

• After DBS and UOB, OCBC is the third largest local bank in Singapore. Like UOB, it primarily focuses on Singapore and Malaysia, with 63% of its revenue from Singapore and 22% from Malaysia.^[20] It also competes with DBS in other Asian countries, primarily China. In January 2006, it purchased a 12.2% stake in China’s Ningbo Commercial Bank. On October 2009, OCBC outbid DBS to purchase ING’s Asian Private Banking business for US$1,463 million in cash.^[21] This business provides wealth management in 11 markets, including Hong Kong, the Philippines and Singapore.

• Maybank is the largest bank and financial group in Malaysia, with 70.6% of its revenues coming from that region.^[22] Maybank gets 11.6% of its revenues from Singapore also competes with DBS Indonesia and the Philippines. Maybank also challenges DBS’s IB Asia with Maybank Islamic, which controls a 38.8% market share as of June 2009.^[23]

References

1. ↑ ^{1.0 1.1 1.2 1.3} DBS Financial Performance Summary 2009. "Overview" pg.2
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 2.13} DBS Annual Report 2008. "Management Discussion and Analysis" pgs. 25-35
3. ↑ ^{3.0 3.1} Wall Street Journal, "DBS Takes Further Write-Downs Related to Its Portfolio of CDOs", 2/15/08
4. ↑ Asean Affairs, "DBS' Dubai-exposure about $1.8 billion", 12/1/09
5. ↑ Asia One, "Lehman-linked notes worthless", 10/30/08
6. ↑ ^{6.0 6.1 6.2} Businessworld, "DBS Chief Seeks Expansion In SE Asia, India", 2/5/10
7. ↑ DBS Annual Report 2008. "Notes to the Financial Statements" pgs. 118-122
8. ↑ [http://www.dbs.com/newsroom/2010/press100730.aspx DBS Group Holdings Investor Relations: "DBS SECOND-QUARTER EARNINGS RISE 30% TO SGD 718 MILLION BEFORE GOODWILL IMPAIRMENT" 30 July 2010]
9. ↑ ^{9.0 9.1 9.2 9.3 9.4}
10. ↑ ^{10.0 10.1} Channel NewsAsia, "Singapore's DBS Bank unveils plans for expansion in China" 5/25/07
11. ↑ AMEinfo "DBS, the largest bank in Singapore, receives licence to operate at the DIFC" 4/2/06
12. ↑ Reuters, "Singapore punishes 10 firms over Lehman notes sale", 7/709
13. ↑ Reuters, "Singapore Central Bank lifts ban on structured note sales", 2/11/10
14. ↑ Asia One, "Singapore's DBS Bank unveils plans for expansion in China", 5/25/07
15. ↑ Reuters, "Dubai World seeks $22 bln debt freeze this month", 2/10/10
16. ↑ Reuters, "DBS says positive on loan talks with Dubai World unit", 2/5/10
17. ↑ Bloomberg, "Asia Needs Higher Interest Rates to Avert Bubbles, ADB Says", 4/13/10
18. ↑ [http://www.efma.com/index.php/efma_observatory/defaut/index/EN/3/218 EFMA, "Singapore--Products"]
19. ↑ UOB Annual Report 2008. "Chairman's statement", pg. 11
20. ↑ OCBC Annual Report 2008. "Management Discussion and Analysis", pgs. 50-60
21. ↑ Forbes, "OCBC buying ING Asia private bank for $1.5 bln", 10/15/10
22. ↑ Maybank Annual Report 2009. "Segment Information", pg. 59
23. ↑ Maybank Press Release, "Maybank Islamic Launches Shariah Compliant Collateral Management Arrangement financing", 8/13/09