January 29

2024 Review: Wondering why the DBS share price dropped today?

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If you’ve been at the receiving end of the DBS outage on 1 November, you might slowly understand why the DBS share price in Singapore has been stagnating.

Right, right. Live more, queue more? You might be forgiven for thinking that given the most recent disruptions.
Right, right. Live more, queue more? You might be forgiven for thinking that given the most recent disruptions.

On 1st November, after the outage, the Monetary Authority of Singapore (MAS) instituted a series of broad sweeping restrictions to what DBS could and couldn’t do.

In its media release, MAS said,

The Monetary Authority of Singapore (MAS) has imposed a six-month pause on DBS Bank Ltd’s (DBS Bank) non-essential IT changes to ensure that the bank keeps sharp focus on restoring the resilience of its digital banking services.

DBS Bank will not be allowed to acquire new business ventures during this period or reduce the size of its branch and ATM networks in Singapore.

If you look at the timeline, it is indeed worrying. DBS experienced a series of 5 major disruptions

  1. on 29 March,
  2. 5 May,
  3. 26 September,
  4. 14 October,
  5. and 20 October 2023.

It’s sufficient reason to see its share price dipping from its all-time high, following its record breaking year in 2022.

Above, you can see its share price reflecting its record year in 2022.
Above, you can see its share price reflecting its record year in 2022.

And the question really is,

Will DBS recover more strongly after this?

The TLDR version is, in my humble opinion, yes.

And that’s why we think that the current price hovering around $32, is quite a steal for a bank such as DBS.

Are the disruptions overpriced?

If you’ve observed the share price chart over the past year, you would have seen DBS’ share price rightly crashing after every disruption.

Each time a disruption has happened, you have seen the share price cratering.
Each time a disruption has happened, you have seen the share price cratering.

And with the latest 1 November 2023 announcement restricting DBS’ ability to acquire new business ventures, it has weighed on investor sentiment of DBS’ ability to improve its net profits.

Especially after its net profit has shot significantly following the acquisition of the Citi Taiwan business, and the amalgamation of Lakshmi Vilas Bank (LVB) with DBS India in late 2020.

But I think there’s an underestimation of just how much DBS can do internally to improve its operating margins.

A reset

If you’ve looked at DBS over the years, it’s really grown into quite a digital banking behemoth.

And perhaps this pause is a good time to review how far it has grown, so that it can adapt its digital infrastructure for the future.

A consumer’s perspective of DBS’ banking franchise

If you are a consumer using the DBS Digibank app in Singapore, you would have probably been quite frustrated. After all, with loading times averaging 4.6s, you would be irritated by the loading sign of DBS’ logo.

Especially if you’re used to laser fast loading times averaging 1.4s with digital-only banks like Revolut, Wise, or even GXS.

It is also not the easiest interface to use, with the app overloaded with way too many functions and features.

It is a good time to improve, but whether it does, is another different matter.

Accelerating the move towards digital banking

DBS is quite smart. For those in Singapore who’ve seen their $3 Paylah campaign, where they subsidise the cost of meals by $3 every Friday, one might say they are just doing good.

But from the business point of view, this has actually resulted in them being top of mind as the digital wallet of choice.

Sure, it’s cost them $300,000 every Friday by subsidising the cost of the first 100,000 customers.

But it’s also meant that it has pushed the other digital wallets, like those from GrabPay, or OCBC, far, far behind.

And if you look at what Piyush Gupta, the CEO of DBS said in his CEO Reflections in the 2022 Annual Report,

In the consumer and SME businesses in Singapore and Hong Kong, where the benefits of digitalisation are most visible, we grew the proportion of digitally-engaged customers from 42% in 2017 to 60% in 2022.

Over the past five years, these customers brought in more than twice the income on average than non-digital customers. They were also more cost efficient to serve.

See that?

Twice the income.

By accelerating its race to be top of mind amongst those who are digitally savvy, such as the younger population under 50, it has reduced the costs of serving these customers.

Part of the costs to a bank include the physical branches it has to maintain. With less use of these branches by the younger banking customers, DBS can become more cost efficient in serving these customers.

What’s also important is noting what Piyush argued,

In 2017, we laid out our thesis that digitalisation would enable us to increase wallet share with lower marginal costs.

If you look at a bank like DBS, what it hopes to do is to grow its income amongst those who save, spend, and borrow with it.

All of these three activities will allow it to grow its income meaningfully.

So the DBS Paylah campaign was part of a larger campaign to get customers to place and save money into DBS’ wallets.

How does this earn them money?

If you put your money with DBS, they can then use this money to lend, or to invest.

This is how banks make money.

The breakdown in income, with Consumer Banking being the second highest share of total income.
The breakdown in income, with Consumer Banking being the second highest share of total income.

Quality of earnings remains the best amongst the local banks

One thing I’ve enjoyed seeing in DBS, compared to the other banks, is that it has continuously improved its operating margins and returns on equity.

From the comparison we did across the 3 banks, DBS came out tops.

And its only to be expected, as it continues to accelerate its digital transformation.

But you might be here thinking,

Gosh, we keep talking about digital transformation, but what exactly is it?

And why does it matter for a bank?

If you look at one of DBS’ key performance indicators, its stated front and centre that it wants to be more a technology company, and less of a bank.

Whilst it continues to have the traditional KPIs of a bank, this has adjusted and shifted over the years
Whilst it continues to have the traditional KPIs of a bank, this has adjusted and shifted over the years

To those ends, it has strived to become the digital bank of choice for customers. This has directly correlated to a rise of more cost-efficient incomes.

Its share of digital income has grown consistently.
Its share of digital income has grown consistently.

An example of how this works out is the nudge you’ve probably gotten on your DBS app telling you that you could probably improve your return on savings by investing in a Regular Savings Plan.

That directly gives income to DBS, as the 0.83% service fee you pay for that plan feeds into DBS’ income.

Imagine this scaling across millions of customers, and you can see why DBS has focused so heavily on this.

Trust its management team for its execution

Piyush is 64 today, and has taken over DBS for the past 14 years, since he took over in 2009.

How far would you trust this team?
How far would you trust this team?

And you would have seen its share price consistently grow over the past 14 years.

Do you trust this team to take the DBS brand further forward, despite the many problems its faced?

I think it will.

My money’s on them. Who’s your money on?

 


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