Trying to understand DBS’s return on equity of 18%

DBS announced their annual figures at the beginning of this week.

I thought I’d take some time to look at some of the financial data in more detail over time.

There shouldn’t be too much analysis, just more of me talking through the numbers.

Dividend payout ratio

More and more investors are attracted to DBS as a share to generate income for their pension.

The chart below shows DBS’s dividend payout ratio over a period of approximately 19 years:

Dividend payout is how much of their net income they pay out as dividends.

If you see this change over time, I think it’s safe to assume that the extent to which management chooses to pay out will not remain consistent. Dividend payments have been good over the last 5 years, but it is also good to recognize that the dividend payout has also increased over the 5 years.

The income you receive largely corresponds to what you expected and what does the reality look like. If you expect your income to be of a certain kind and it isn’t, you would be extremely shocked.

I got curious as to why there was a period where the payout ratio was low for a period from 2010 to 2016. I tried to see if I could get any answer here.

Return on equity

Banks are usually valued based on the amount you pay for the book value. What a bank traditionally makes is how you optimize between your deposits and loans and that makes up a large part of your balance sheet. If you can lend more, and at a higher rate than what you pay for deposits, you can earn more. But if you don’t have enough deposits, then it’s also a problem.

And so the return on equity, seen in the long term, tells you how well a bank earns for €1 of equity. It can also help you see if some banks are better than the rest.

The ROE for the 3 local banks UOB, OCBC and DBS until 2024 is shown below:

The DBS ROE has been seriously high lately, but we can see that OCBC also achieved that kind of ROE in 2006. But to a large extent, their ROE is pretty close to the other two banks. UOB and OCBC’s ROE has actually improved since 2021.

It feels like they are influenced by the same environment and not too different.

Is the improvement due to DBS’s focus on asset management?

I don’t know, but I don’t think so.

The table below shows the distribution of their income contribution:

The largest amounts for a bank usually come from their lending activities, but I think more and more people think that net commission income is becoming increasingly important.

Maybe that will be the case in 2026, but overall we see net commission income being fairly proportional to total revenue over time. Even if we say margins are better for an AUM company, this should improve ROE above the normal range of 10-14% way back when.

I have set out the net fees and commission income below:

DBS does not generate major income from Investment Banking and in the past this has included their brokerage activities.

Asset management is starting to become significant. The last two years saw growth of 45% and 29%, but between 2010 and 2013 DBS also saw significant growth in asset management, but their ROE hovers around 11% with no significant improvement.

I don’t think this is the cause of the big jump in ROE.

Growth of DBS loans and deposits

I indexed loan growth for the three banks to show how $1 will grow over the past 18 years:

This should show you whether DBS has been growing its loans (and probably its deposits) at a higher clip than the others.

Turns out not really.

And in recent years this has not been the phase of rapid growth. That was more between 2008 and 2014.

That seems to coincide with the housing boom haha.

Here’s a look at the growth of DBS loans and deposits:

I imagine that the loan and deposit will be the lower limit of the last 18 years.

Net interest margins

Perhaps the biggest link to ROE is net interest margins.

This is the average margin they lend versus the deposit they paid.

In the recent high interest rate environment, banks were still able to lend, but did not pay as high for deposits. So their NIM or net interest margin is quite high.

Would that be accompanied by a potential recession or would we go back to a lower interest rate regime? I don’t know, but I think this is an overhang.

NIM and ROE are not the most important thing, with lower interest rates there are rightly more people interested in borrowing and loan growth should be better (if the recession is not too bad).

Cost control

The cost-to-income ratio for the three banks shows how much the costs of their non-lending activities are compared to the revenue they earn.

It is true that financial institutions should be able to achieve certain economies of scope, and as they consume more banks through acquisitions, they should be able to reduce their costs relative to revenues.

I show the costs and income below:

You can see how much better DBS and OCBC can do in this regard compared to UOB.

But it must be said that the cost to income ratio of 45% is very good, as First Citizens Bancshares in the US have it between 55 and 60%.

Epilogue

After looking at the data, I don’t think DBS’s better ROE is due to any one factor.

1. Better cost control (lower cost-income)
2. Higher margins (higher NIM compared to history)
3. Maybe some of it really is due to the growth of the card and asset management business.

That’s probably it.

I guess after this the remaining question is, if the interest rate environment is lower, would loan growth come back when real estate prices are controlled.

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