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DBS puts the D in Gandalf and conjures up blue skies

Chan Chao Peh
Chan Chao Peh • 4 min read
DBS puts the D in Gandalf and conjures up blue skies
SINGAPORE (Dec 25): First, there were the FANG stocks — Facebook, Amazon.com, Netflix and Alphabet’s Google. Then, FANG became FAANG, with iPhone maker Apple added to the mix. Now, DBS Group Holdings has come up with another acronym for big technology
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SINGAPORE (Dec 25): First, there were the FANG stocks — Facebook, Amazon.com, Netflix and Alphabet’s Google. Then, FANG became FAANG, with iPhone maker Apple added to the mix. Now, DBS Group Holdings has come up with another acronym for big technology stocks changing the world — GANDALF (as in the wizard from The Lord of the Rings), which includes the FAANG stocks plus LinkedIn and itself.

It is rather contrived, of course. LinkedIn is now part of Microsoft, after being acquired in December 2016. More to the point, DBS is the archetypal established player that would potentially have the most to lose in the face of technology-driven disruption. Yet, DBS is determined to avoid succumbing to this fate and has been relentless in its effort to harness technology and make use of data to protect its turf and fuel its growth.

To its credit, much of that work has been done in-house, underscoring its commitment to being a technology company of sorts. In 2009, about 85% of its technology functions were outsourced. Now, about 85% is done internally. “If you want to be a technology company, you’d better own your own technology,” says Piyush Gupta, CEO of DBS.

Among other things, DBS has consolidated its data centres and moved a lot of its computing systems onto the cloud. It has introduced the “digibank”, essentially a smartphone app that makes it easier for customers to perform common transactions such as fund transfers. There are also other apps that are more specialised, such as the “PayLah!” mobile wallet.

While much of this sounds prosaic, the things that DBS claims to be able to do with its grasp of technology and data are quite interesting. For instance, the bank says it can predict when its relationship managers are poised to resign by analysing data on their sales performance and other behavioural patterns. DBS also says the digitalisation of its operations has improved its cost-to-income ratio, from 45% in 2014 to an annualised 42.5% this year.

The gains were especially pronounced for the bank’s consumer and small and medium- sized enterprise businesses in Singapore and Hong Kong, which generate a combined 44% of the bank’s total income. Between 2015 and this year, the annualised cost-to-income ratio for the Singapore and Hong Kong consumer and SME markets combined improved from 49% to 43%.

These business segments have also been getting more profitable. Their return on equity improved from 22% in 2015 to 24% this year. The entire group chalked up an ROE of 11.2% in 2015 and 9.7% this year. Income for the Singapore and Hong Kong consumer and SME markets grew at a compounded 11% a year since 2015, versus 4% a year for the entire bank. DBS says customers who predominantly use its digital platforms have generated a 23% compound annual growth rate in income, and an ROE of 27%. By contrast, so-called “traditional” customers are a -2% CAGR drag on income and generate an ROE of only 19%. In addition, digital consumer customers are being acquired by the bank at 43% of the cost of acquiring traditional customers. Similarly, digital SME customers are being acquired at 54% of the cost of acquiring traditional SME customers.

Gupta says he had wanted to disclose this data last year, but was held back by the board. The go-ahead was finally given after three years of data had been carefully analysed. Now, DBS is guiding for a bank-wide ROE of 13.5% to 14.5% a year, discernibly higher than its historical peak of 12.7% achieved in 2006 as well as 10.3% achieved last year and 9.7% this year.

If DBS is indeed able to deliver such a level of ROE over the next five years, it would translate into a share price of between $43.70 and $47.80 under a “blue sky” scenario, according to Credit Suisse.

So, is DBS about to join the ranks of the FANG stocks? Certainly, its shares have enjoyed a FANG-esque rally recently. Since the beginning of the year, they have jumped more than 42%. And, on Nov 17, the market capitalisation of DBS overtook that of Singapore Telecommunications.

Yet, bank stocks in general have done well. The other two local banks, Oversea-Chinese Banking Corp and United Overseas Bank, have seen their shares gain 37.33% and 27.89% respectively this year. And, for all its progress in digitalisation, earnings at DBS are still greatly influenced by factors related to the banking cycle. For 3QFY2017, DBS reported a 23% y-o-y earnings decline to $822 million, owing to a near-doubling in provisions of $815 million, much of it related to troubled borrowers in the oil and gas sector.

For now, Credit Suisse is forecasting an ROE of 12.1% to 12.2% for 2018 and 2019, and it has a price target of $27.40 for the stock. It remains to be seen whether Gupta, like the wizard Gandalf, will be able to conjure up even bluer skies.

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