With worst behind, DBS gets ready for what comes next, normalcy or not

DBS's Tier 1 common equity capital is both robust at about 14% of risk-weighted assets, and not a lot lower from pre-pandemic levels

Singapore’s largest bank has history and geography both aligned in its favor. Its strategy is nimble, balance sheet healthy, and the lending landscape as promising as last year’s was gloomy. With a little luck, DBS Group Holdings Ltd. will exude strength when it meets upcoming virtual challengers.

The lender’s fourth-quarter results don’t really give a glimpse of what to expect. Net income fell 33 per cent from a year earlier to S$1.01 billion ($762 million), missing the average analyst estimate in a Bloomberg News poll. Credit costs stayed elevated at S$577 million, broadly unchanged from the previous three months. With this, however, DBS has made full-year loan-loss provisions of slightly more than S$3 billion, matching the lower end of the two-year S$3 billion to S$5 billion hit it had anticipated from Covid-19. 

With the worst of loan impairment behind it, DBS’s Tier 1 common equity capital is both robust at about 14 per cent of risk-weighted assets, and not a lot lower from pre-pandemic levels.

On the strategic front, the emphasis on wealth management paid off with an 11 per cent jump in income last year. Like at all major banks, the Department of Luck is being run by frothy assets markets. While trading income dipped slightly, net income from investment securities almost tripled in 2020. 

The historical advantage comes from being the market leader in the right Asian financial center. London-headquartered HSBC Holdings Plc, which is entangled in Hong Kong’s political turmoil, will have to spend its 2021 managing the conflicting pressures brought on it by China and the West. Not only is DBS harbored in safer Singapore, but it took out additional insurance last year by buying a bank in India, where a new credit cycle is long overdue. By rescuing the failed Lakshmi Vilas Bank Ltd., DBS got 563 branches, 974 ATMs and a $1.6 billion franchise in retail liabilities.

Although DBS saw its net interest margin shrink yet again last quarter to 1.49 per cent, the two-year slide in return on equity may be nearing an end. Borrowing short-term funds to make long-term loans should get more lucrative as yield curves steepen, says Daniel Tabbush, an independent banking analyst. Improving profitability will help DBS take on fresh competition when Singapore’s newly licensed online banks, run by ride-hailing app Grab Holdings Ltd. and mobile games maker Sea Ltd., open for business.

With coronavirus infections well under control, and vaccination under way, both the island-state and DBS can hope for a return to more normal economic conditions. Singapore’s housing market could play spoiler if a combination of cheap money and exuberance starts to make prices unaffordable, forcing authorities to clamp down on mortgage demand. 

For now, though, DBS has most of its ducks in a row.