Is It Safe To Invest In DBS Now? (Part 2)

IMPORTANT: Please read the disclaimer before continuing.

A few days ago, I published an article on the sustainability of dividend yields from DBS.

I have since received many questions from readers wanting to know whether DBS loans are at risk. While I am not an expert on banks, I will break down below the different things that clue us in to the quality of loans.

Breakdown of Loans (Geography and Industry)

These factors are important as diversified loans are less risky. We have to take the geographical concentration into consideration as some of them have weaker economies.

Likewise, industries such as building and manufacturing are deemed more risky. For instance, when the property industry suffers, companies in the industry may not be able to repay their loans.

Figure 1: Geographical concentration/SGD billion (left)

Figure 2: Industry Concentration/SGD billion (right)

Figure 1: Singapore (47%), Hong Kong (15%), Rest of Greater China (15%) rank the highest.

My personal take is that Singapore will be badly affected by Covid-19 because we are an open economy. As we are heavily reliant on trade, overall trade volume will drop with the lockdown. We should be prepared for some loans to go bad as businesses may be affected.

However, based on how the Singapore Government has navigated past recessions, we should believe that there will be measures put in place to lift the economy and minimize economic impact. That may be assuring because DBS has 47% of their loans in Singapore.

As for other geographical locations, the risk is minimised as it is less concentrated.

Figure 2: Building and construction (22%), housing loans (21%), general commerce (13%), manufacturing (11%) rank the highest.

From an industry perspective, the loan book may look scary because 44% of it is in property-related loans.

However, it is uncertain whether these properties are for investment or living purposes. This is important as occupants will likely continue to service their loans because they need a place to live. This makes it hard to determine whether the loans will go bad. Hence, we have to look at the Loan-to-Value ratio.

Loan-to-Value Ratio (LTV)

LTV ratio is essentially how much the loan portion is as a percentage of the total appraised value of a real property. For example, if a bank loans a person 6 million dollars and also receives a property collateral of 10 million, the LTV ratio is 60%. Unless the property value decreases by 4 million or more, the bank loan is still considered safe.

LTV Ratio for Residential Mortgage

Singapore: As prices for public housing tend to be more stable, it should not pose a big risk to DBS. Therefore, we will be focusing on private housing data. Looking back to data compiled by the Singapore Government, the private residential prices fell by 20%~ in the 2008/09 crisis. Unless the current situation evolves to be similar to the 2008/9 crisis, the loans under the LTV range of 51-80% may not be affected.

Other countries: As the situation is still unfolding, we do not know how it will develop. For China, they are recovering very well and the economy is getting back on its feet.

LTV Ratio for Loans to Corporate

I feel that the loans issued for Singapore is relatively safe. As I shared earlier, I believe the Government will take proactive steps to minimize the economic impact on Corporates.

Looking at the table above, we can see that DBS’ exposure to “Hong Kong” and “Rest of Greater China” is not that bad as majority of their loans are made within the LTV range of “Up to 50%”.

Now, let’s go on to look at the solvency ratio of DBS.

Basel III Tier 1 Capital Ratio

For those who are new to this ratio, the Basel III was implemented by the Basel Committee after the 2008 financial crisis. It is used to test a bank’s ability to absorb unexpected loan losses.

This capital is referring to the cash set aside by banks to absorb losses immediately when they occur.

Figure 3: Comparison of Basel III Tier 1 Ratios

Figure 3: Based on the numbers above, our local banks have a pretty good standing as they can absorb up to 14 – 15% of total loan losses. For the non-performing loan ratio, it was 2.9% and 1.5% for FY2009 and FY2008 respectively. This means DBS is well capitalized.

DBS Guidance

DBS Group Holdings signaled that its estimate for a 2 per cent revenue hit from the coronavirus may be revised if the pandemic is unexpectedly prolonged.

“This is a moving target,” the bank’s head of institutional banking, Ms Tan Su Shan, said when asked about the projection in a Bloomberg Television interview on Thursday (March 12). “We are living day by day, week by week right now.”

For the source, click here.

While the following was shared to the public, it is important for us to be practical and assume that things could possibly go way worse instead.

Conclusion

While there are plenty of risks surrounding the quality of a bank’s loan portfolio, a bank’s job is to manage credit risks. Thus, for us as minority shareholders, it is impossible to scrutinise every loan. The better approach then is to see how the management navigated its last crisis.

In this regard, I believe DBS has done a good job.

Before you buy any business, consider these questions:

1. How well do you understand the business?
2. Why do you want to buy the business?
3. What is your time horizon? Is it for long term appreciation or short quick gains?
4. Have you done proper personal planning and budgeting?
5. Are you using money that you need in the next few months?

Everyone has different financial circumstances. Some have dependents, some do not.

Do not be greedy, invest with only what you can afford.

Meanwhile, I stand by the thought that the DBS ~$17 range is a good starter entry for dividends. Pace your bullets, though!

As you can see, I just did my first order purchase on 19 March!

Which Singapore bank do you love the most? Leave a comment here to let me know what you think!

PS: If you like my articles, subscribe to my newsletter where I will share with you my latest thoughts and useful information to outperform. Or you can visit https://kelvestor.com/subscribe/.

Sources

This information are available to the public via this link or the respective investor relations websites.

My disclaimer can be found here.