DBS CEO Piyush Gupta
For some time now, DBS has delivered a convincing narrative: that its investments in technology and digital banking will drive the cost-income ratio down, making the bank more profitable.
Late last year, DBS calculated, and published, a methodology showing that a digitally engaged customer delivers a cost-to-income ratio fully 20 percentage points lower than traditional clients.
CEO Piyush Gupta has argued that the digital banking channel in India, digibank, ought to settle at a cost-income ratio around 30%, with Indonesia following a similar model, and that the whole bank should be heading in that direction.
Why, then, did DBS on Thursday report a fourth-quarter cost-income ratio of 44%, up from 41% in the previous quarter?
The answer is fairly simple, but it raises a bigger question.
The quick answer is the acquisition of ANZ’s wealth management businesses in Asia, announced in late 2016. The acquisition brought across S$11 billion of deposits and S$8 billion of loans by the end of 2017, but a book of business operating under quite different metrics than those that were prevalent at DBS.
“The overall cost-income ratio at ANZ [in the business they sold] was close to 90%, that’s one reason they were selling it,” says Gupta. “We think we can bring it on to our books at 55, 60%, but that’s higher than our other business.”
To an extent, that is unavoidable if DBS wants a presence in the markets where those assets are: particularly Taiwan and Indonesia.
“In Hong Kong and Singapore the costs are very low: we bring the business on at a very marginal cost,” Gupta says. “In Taiwan it’s high, over 80%, and in Indonesia it’s in the 60s. It’s still profitable and returns accretive. But as it comes in, it puts a drag on our cost-income ratio.”
Gupta tells Euromoney the credit quality in the acquired loan book is “of a quality very similar to ours” and that reserves were brought across in the same transaction as the loans and deposits, more than adequate for any losses that might come from the portfolio.
However, it still raises a question. In Thursday’s briefing, Gupta confirmed to Euromoney that it was a relief, in hindsight, that the bank’s bid for Indonesia’s Danamon never went through – it is instead being sold to MUFG – and that Danamon just wouldn’t fit with DBS’s modern digital strategy.
So, by the same logic, did the ANZ purchase make sense?
“The digital transformation agenda is so important, and anything that would distract us from pursuing that is not a good idea,” Gupta says. “So with ANZ, we spent a long time thinking about it, only because we thought how it might distract us from the digital journey we are undertaking.
“We decided to go ahead and that we can do it without putting us too far behind in our agenda. But looking back, we are at least a couple of quarters behind where we would be,” had the ANZ purchase not been done, in terms of the expense ratios.
He adds: “On balance it was a worthwhile trade-off, but if we were trying to do a large deal at scale, it would set us back a couple of years, and I don’t think it’s worth it.”
There were some other drags on the cost-income ratio, among them increased marketing spend and bringing forward plans to migrate data to cloud servers, and he predicts a full-year cost-income figure of 43%, the same as the full-year number for 2017 and 2016.
And none of this stopped DBS recording record full-year and quarterly earnings on Thursday with the problematic oil and gas exposures apparently digested.
So, no lasting damage, it would appear, but it is clear that inorganic expansion and the quest for minimum costs are not compatible.