The Euromoney 25: DBS

Euromoney, January 2018

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Four years on from a pivotal senior staff meeting in Seoul, when chief executive Piyush Gupta resolved it was time to stop comparing the bank with traditional peers and instead start comparing it with big data firms like Amazon, DBS’s digital reinvention is visible everywhere.

When it rolls out new products like digibank in India, it does so tech-style, launching beta versions into the market and updating them (sometimes) weekly as the bank learns from market experience. It is also making more use of the public cloud, reducing the need for data centres.

Better still, it is perhaps the only bank that does a good job of quantifying what tech means for profitability.

It can dissect to a minute degree the performance of digital versus traditional customers, on return on equity, income, frequency of transaction, cost to service and a host of other metrics.

For example, CFO Chng Sok Hui says digital consumer and small and medium-sized enterprise customers are delivering 27% return on equity and a 23% compound annual growth rate since 2015; for traditional clients it is 19% ROE and -2% CAGR.

This, coupled with long-term potential in biometric-savvy digital banks in India and Indonesia, is causing more analysts to make DBS their top pick in the country or in regional banking.

“The case I’m making,” Gupta says, “is that I believe it is possible for an incumbent player, an existing legacy bank like us, to transform ourselves and compete. It’s not just a possibility, it’s an imperative. If we don’t transform ourselves, we’re dead.”

But what about how it is doing as a bank?

In many respects, it is well placed and has delivered on long-term goals. When he joined in 2009, Gupta wanted to position the bank for intra-regional trade and capital flows, which it has done; to build a regional wealth business, which it has also done (with this year’s ANZ acquisitions cementing the bank as a top-five player in the region in asset terms, where it was once outside the top 30); and to make sure his bank was diversified, including consumer finance and SME business in growth markets.

This last goal is still a work in progress, and China is a tough nut to crack. But there is clear momentum in India and Indonesia, even if the digital offerings will take a while to deliver profitability.

Transforming a bank’s ethos and transforming its financial performance are not the same thing, but outcomes since Gupta joined in 2009 have kept pace with Asia and beaten sluggish Singapore itself. Net profit is up at a CAGR of 10.83% between 2009 and 2016 (the last full-year number to be posted so far), and group income 8.25%. Return on equity has proven a tougher needle to move, from 8.4% in 2009 to 9.4% in the third quarter of 2017, although it has been higher in the meantime.

It is more asset quality that gives one pause for thought.

DBS’s third-quarter profit fell 23% after the bank almost doubled its provisions for loans to the oil and gas services sector. The underlying business is fine – total income was actually up 4% year on year and profit before allowances by 9% – but how did DBS miss the trouble ahead with this sector and end up with exposures like this in the first place?

Gupta points out that oil and gas services is 2% of the overall lending book and that the whole thing demonstrates the bank’s diversification.

“We were able to take this big hit on oil and gas and swallowed that without a down-year in P&L,” he says, suggesting the full-year numbers will still look strong. “It speaks to our resilience.”

It also speaks to an error in lending decisions.

Citi, no slouch itself on digital, says DBS has “one of the most comprehensive digital strategies of any bank in the world, let alone Asia,” and believes that the combination of digital gains and capital efficiency could lead to a return on equity of over 14% in the next five years.

Credit Suisse is predicting a return of up to 121% over that period. The market is convinced.

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