DBS (SGX: D05)

A while ago I posted some fundamental analysis regarding OCBC(link), and here is one for DBS. I may do another article detailing the comparisons between these 2 (or even with UOB's) but this article will just mainly be focusing on DBS.

The general sentiment I received in my research into Singapore's big 3 banks is that many prefer DBS. As we all know that since share price is ultimately decided by investors sentiment, this could be a factor to keep in mind, although this is extremely un-quantifiable. I would take time to peer upon the various factors such as income distribution by regions/sectors and acquisitions/divestitures, etc. but I feel that these factors will ultimately reflect positively or negatively in the numbers discussed below so I won't drag everyone through a long essay that talks about everything.

Note: I ran through the 8 years of annual reports myself and the numbers I used were from the reports, thus it might be different from values reported elsewhere such as websites. Adjustments were also done based on my own judgement. Some values which might seem doubtful or raises further clarification were checked with notes to financial statements, and not all clarifications are stated here.
I usually write my articles over a period of time and thus there might be price inconsistencies to the market.

*Since formatting table in blog posts is extremely tedious I'll attach a excel doc for referring instead. Please refer to it should you need data to understand what some paragraphs are talking about.
Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6ha2RkdmVsNlRkdUk/view?usp=sharing


1.Financials
Revenue is growing steadily at nearly 6% compounded annual growth rate (CAGR). Operating expenses were also kept relatively stable at around 52%, except for 2009 and 2010. In 2009 there is a relatively huge loss arising from credits and other losses - mainly nonperforming loans (NPL). In 2010, a large goodwill expense arose from the loss of fair gains from acquisition of DBS HK. Technically one could say these 2 spike in expenses were caused by management oversight/poor decision making etc. but its really unfair for one like me to judge so we'll leave it as that.

On the positive side, net profit margin has been improving from ~30% to over 40% in 2014, bringing 'net profit attributable to shareholders' (hereinafter referred to as net profit) to a CAGR of 7.444%.

The rather high growth of net profit is however, clouded by the high shares issuance rate. The amount of shares from 2007 to 2014 has a CAGR of 5.818%, in my opinion this is ridiculously high. If that amount does not trigger some red flags, viewing it from another perspective, should the bank's net profit stays stagnant, one would be losing a compounded rate of 5.818% (not exactly share price, but it would be eventually reflected) annually from their DBS share holdings due to dilution.

Due to their high increase in amount of shares annually, EPS' CAGR has only been a meager 1.538% despite growth.

Dividends wise, the group paid out $0.68 per share in 2007 and $0.65 in 2008. This 2 values were not tax-exempt since the tax-exemption on dividends only kicked in after 2008. In 2009, dividend per share dropped again to $0.56. I am not exactly sure if the tax-exemption is a factor for the drop in dividends, it doesn't make sense for the group to reduce payouts (with regards to the exemption) since the tax is on us and not them anyway. I could use further clarification on this point as I wasn't exactly in the finance world back then, sorry. The reduction of dividends could possibly be due to the huge increase in expenses in 2009, as mentioned earlier. One should also take note of the payout margin of 81.94% in 2010. I believe due to the huge expenses again, this year the group has really stretched itself hard to maintain the payout amount.
Since then, the group has pushed their payout margin lower and lower to the current levels of ~35%, this has however, sacrificed quite a bit of payout increment.

Yield has increased since the average to 4.18%. It is not exactly a large increment from the average of 3.66% (2008's 7.37% removed as outlier), although one could reason that with the low payout margins, yields could be expected to increase as there is a lot of room for it to. Sounds speculative though, I won't bet on it.

Tier 1 capital adequacy ratio has been healthy at ~12%. IMO as long as the CAR is fine there isn't really much issues to harp about.

2. Balance sheets and ratios 
Assets and liabilities have been growing at a pretty fast rate throughout the years, with the CAGR of assets at 8.257% and liabilities at 8.375%, although liabilities has a sliiightly higher growth rate, they are pretty similar, so its fine. That has given us an average debt ratio of 0.9, which is fine too. Nothing spectacular, nothing bad.

Net assets has been rising pretty well at a CAGR of 7.139%. However, as mentioned above, this number has been clouded by an also very high share issuance rate of 5.818% CAGR. That has resulted in net assets value (NAV) CAGR of only 1.249%. Assuming this rate continues t = ∞ and market is efficient, share price would only be expected to appreciate at 1.249% yearly, which is... rather unremarkable.

 However, not all is that bad, at the current levels of $13.87, Price/NAV is at quite a low value of 0.833. In another way to put it is that should DBS wind up now and distributes everything left to its shareholders, for every $0.833 of shares you purchase you would receive $1. Of course there might be other complications but this is the general idea behind NAV.
DBS's average price/NAV isn't usually high, having an average of 1.087 throughout the years, while dropping to a drastic low of 0.58 in 2008. So should one be expecting this crisis to mirror 2008, DBS's share price still have a long way to fall - a similar price/NAV to 2008 would give us a share price of $9.66.

In fact the sentiment towards DBS has only increased a lot recently in 2014, where price/nav spiked to all time highs of 1.224. P/E is still reasonable at 12.1, however. The P/E now is rather low at 7.88, versus the average of 12.66.

3. Conclusion 
In conclusion, I feel that for DBS, it is more of a correction than bargain towards their valuation, partly due to the huge growth of share price from 2014-2015. However, the recent drop has also brought them much below than what they are fairly worth. DBS is actually in quite a discounted position NAV wise. However, given their high rate of share issuance, I wouldn't buy this share for the long term gains as the dilution factor here is pretty high and the yields isn't exactly spectacular.

On the other hand, it is quite reasonable to buy for short-term share price appreciation, since investors have a tendency to inflate DBS's share price to much more than it's worth, and its also at quite a bargain at current prices.

Personally, given the numbers, I would vest myself in a higher percentage of OCBC shares than DBS, whereby the purchase of DBS shares is to be sold when prices are reasonably high although their yields isn't that bad either, period, cause I haven't research UOB yet.
Furthermore, given the fact that the 2014's yield is 10 cent lower than 2007's doesn't exactly tick well with me, there's a feeling of stagnation when I am valuating DBS, especially given the high dilution rate.

That's all folks, cheers!

Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6ha2RkdmVsNlRkdUk/view?usp=sharing
Link to article on OCBC: http://theinvestingnoob.blogspot.sg/2016/01/ocbc-sgx-039.html

Disclaimer: This article was written with no intention to solicit funds, any kinds of investments or benefits. I do not bear liabilities should any losses arise from actions made from reading this article nor are entitled to any profits thus risen. I do not represent any company or organization but myself in the writing of this article. Should there are any inquiries or invitation of discussion feel free to contact me in any possible way (facebook, comments, email: Bryan_rong@hotmail.com etc.)