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A 76% year-on-year climb in third-quarter net profit, accompanied by a plunge in the share price on the day it is announced: these are complicated times for a bank in Asia, a region in the midst of a worsening trade war.
“Our own sense is that the direct impact of the trade war on the macroeconomics will not be as material as people worry,” chief executive Piyush Gupta said at the results briefing. “What is more worrying is the impact of market sentiment: the indirect impact of the trade war.”
He is right. If you take the sentiment out of it, DBS is doing just fine.
Third-quarter income, up 10%, was a record at S$3.38 billion ($2.47 billion); nine-month profit, at S$4.31 billion, is also a record. Profits are well up because the heavy allowances for oil and gas-support service exposures are now digested, and the formation of new non-performing assets is declining.
Return on equity stands at 12.4% and the balance sheet is strong. Wealth management, small and medium-sized enterprise services and transaction banking are going from strength to strength.
But you can’t wholly take the sentiment out of it. Market sentiment is the reason DBS’s investment banking fees were down 66% year on year.
It is the reason new mortgages are slowing down and DBS has downgraded the amount by which the mortgage book is expected to grow this year. Growth of loans generally will decelerate to mid-single digits – still growth, but much slower than we have been used to.
The acquisition of consumer and wealth businesses from ANZ is largely absorbed now, which have pushed up expenses but otherwise brought considerable regional heft in areas where it would have been hard to grow organically, such as Indonesia and Taiwan. History will likely view the acquisition, which was cheap and opportunistic, as successful.
Market movements notwithstanding, DBS has continued to impress as the region’s – if not the world’s – most dynamic innovator in banking.
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| Piyush Gupta |
At 2017’s Singapore fintech festival it unveiled a highly influential metric to measure the return on equity created by digital versus analogue clients, widely talked about throughout the industry; 2018’s event was accompanied by the news that DBS will tie up with Go-Jek, the Indonesian transportation and technology group. The two will be aligned in Go-Jek’s launch in Singapore, but it is probably Go-Jek’s strength in Indonesia, including its Go-Pay payments channel, that offers the greater opportunity to DBS itself.
Having learned some valuable lessons from the launch of its digibank automated brand in India – still not profitable, apparently – it has launched a similar biometric vehicle in Indonesia, with swifter traction, and the Go-Jek tie-up could assist with that venture’s potential.
“We are stepping up to partner with like-minded companies like Go-Jek, one of southeast Asia’s most iconic technology companies, to build inclusive digital ecosystems for our customers,” says Tan Su Shan, group head of consumer banking and wealth management.
DBS, for all its plaudits for tech, needs a lift, a next story; perhaps that will come from Indonesia and not, as most had expected, from India.
At the third-quarter analyst briefing, Gupta said: “We expect India to continue being a drag on group earnings till 2020 because of the investment costs needed.
“In Indonesia, the trend is positive. digibank is doing well and we are seeing an improvement in the consumer business with ANZ.”
The market, which had begun to value DBS as a bank-tech hybrid – much as Gupta has always wanted – has hit it as a tech company on the way down, just as it did on the way up. At the time of writing, the stock is down 24% since April versus a 14% fall in Singapore’s STI index over the same period.
Gupta remains a visionary chief executive, supported by a strong and stable team of highly capable people: Tan, CFO Chng Sok Hui, chief information officer David Gledhill and transaction services head John Laurens, among others.
However, the coming year will present a different kind of challenge, one in which that sense of digital vision will only go so far.
If the trade war escalates, Singapore stands to suffer, as do most of the markets in which DBS operates – not perhaps in terms of dramatic drops in volume but most certainly in terms of sentiment, as Gupta correctly identifies.
In 2019, DBS will have to combine innovation with old-fashioned, sleeves-rolled-up resilience.
