DBS share price: factors to look at ahead of its Q2 results

Singapore’s largest bank DBS Group Holdings will be announcing its second quarter earnings results for the three months ended June 30, 2019, before the market opens next Monday (July 29, 2019).

DBS is the largest financial services conglomerate in Southeast Asia with a market capitalization value of over S$60 billion. According to DBS’ website, the bank has over nine million customers in 18 markets.

DBS’ largest controlling shareholder is Temasek Holdings, a Singaporean holding company owned by the local government. As of March 2018, Temasek owns 29% of DBS shares. The bank was founded in 1968 and set up by the Singapore government.

Net profit for the previous quarter up by 8.5%

For the first quarter of this year, DBS posted a record profit at S$1.65 billion, an 8.5% increase from a year ago.

Total income was higher by 6% at S$3.55 billion. The bank said a healthy business momentum and a higher net interest margin helped offset the impact of a high base for wealth management, brokerage and investment banking fee income, and a property gain a year ago.

Loans grew 1% in the first quarter from the fourth quarter, while non-trade corporate loans rose by 3% and trade loans fell 4%.

In line with the higher interest rates in Singapore and Hong Kong, net interest margin rose by five basis points to 1.88%.

DBS share price up 12.1% year-to-date

At Tuesday’s (23 July, 2019) share price of S$26.56, DBS’ shares have risen by 12.1% year-to-date, from S$23.69 on January 1, 2019.

Comparing the share price to three years back, the price contrast is even greater as it is close to a 200% increase. Bank stocks made a comeback helped by robust earnings in recent quarters, broadly supported by loan growth.

In 2016, DBS’ shares had plunged to around S$13.50 per share, due to concerns from investors on the bank’s exposure to the oil and gas industry which was then facing defaults from firms amid the low oil prices.

“REIT-like” traits draw ‘Buy’ call from OCBC Investment Research

Last month, OCBC Investment Research upgraded DBS to a ‘buy’, causing the bank’s shares to jump more than 3%. The broker had highlighted DBS’ sharp price correction from its recent high of S$28.64 as one of the reasons to the stock upgrade.

DBS’ stock had fallen to S$24.01 that month due to volatility caused by the trade tensions between the United States and China. A recent fall in interest rates also contributed to the share price fall.

Targeting DBS’ stock fair value at S$29.18, the bank pointed out that DBS's net earnings have grown by a compounded annual growth rate (CAGR) of 10.6% from S$2.04 billion for the financial year of 2009 to S$5.58 billion for the financial year of 2018.

To add to that, the bank’s dividend pay-out has grown by a 7.9% CAGR in the same period from 56 Singapore cents to more than twice that sum now, at S$1.20.

‘With a S$1.20 dividend per share or 30 Singapore cents per quarter, DBS has some real estate investment trust (REIT)-like traits including quarterly dividend pay-out,’ said OCBC, stating that DBS’ dividend yield is at 4.8% when pegged to the share price of DBS at the time the report was written, which was S$24.80.

The research report added that the current prices make it ‘an opportune time to accumulate DBS shares’.

2019 started well for DBS, but dovish inflation landscape likely to impact margins

In his comments on the bank's first quarter earnings results, DBS' chief executive Piyush Gupta said that the bank has had a good start to the year as business momentum was sustained and non-interest income recovered from the recent weakness.

‘The record earnings and return-of-equity progression demonstrates the strengthened profitability of our franchise from digitalisation, a shift towards higher-returns businesses and more nimble execution,’ Mr Gupta said, adding that the bank is ‘well-placed to continue capturing growth opportunities across the region and delivering healthy shareholder returns’.

However, the boost in earnings provided by higher interest rates is likely to fade following the US Federal Reserve’s (Fed) dovish tilt in stance, a situation which will cause Singapore banks to be more reliant on fee income.

The US Fed is expected to cut interest rates this month and markets are predicting for a 25 basis point cut. Analysts are forecasting for either one or two more rate cuts this year, bringing interest rates back to where they were in May 2018.