DBS Group - CIMB Research 2017-11-17: Transforming Into Digital Bank Of Singapore

DBS GROUP HOLDINGS LTD D05.SI

DBS Group - Transforming Into Digital Bank Of Singapore

DBS is ambitious in its digitalisation journey. It wants to be the ‘D’ in the GANDALF stocks – an acronym for the world’s largest tech stocks.
From digitalisation, we believe that DBS would be able to achieve ROE of c.13-14% in the next 3-5 years.
Add maintained. We believe DBS should be in your Singapore core holdings.

Everything from DBS Investor Day was on point – from the robustness of the presentations to the digital initiatives demonstrated by the various showcases; the hospitality, and down to the vibes transmitted by senior management. On stage, CEO Piyush and CFO Sok Hui were Jeff Bezos-esque.

What impressed us was DBS’s ability to offer granular narration on how digitalisation led to enhanced customer stickiness, higher transaction volumes as well as lower costs, i.e. the bank was able to measure the financial performance of its digitalisation efforts.
While DBS is in the midst of its digital transformation (started in 2014), its efforts are already starting to bear tangible fruits. Just based on digitalisation, we believe that the bank would be able to achieve ROE of c.13-14% in the next 3-5 years. This does not include upside from Fed rate normalisation.
We estimate that every 1% uplift in SIBOR/SOR would boost DBS’s ROE by 1%.

DBS is ambitious and serious in its digitalisation journey. It sees itself at the forefront of the world’s digital banks. In fact, it wants to be the ‘D’ in the GANDALF stocks – an acronym for the world’s largest tech stocks (Google, Amazon, Netflix, Apple, Linkedin, Facebook).
In a disruptive world, it is probably time for investors to think laterally and overlay a technology coat on DBS. After all, telcos are already venturing into lending.
The bank emphasised that its digitalisation transformation is not simply a case of having a team to drive innovation within the organisation. It entails re-architecting its technology, insourcing its technology, launching the world’s largest banking API platform, sharpening its customer focus and most importantly, changing the culture by transforming the bank into a 22,000 person start-up.
In addition, DBS’s focus on digitalisation probably means that it would not undertake large-scale M&As in the near- to mid-term as that would divert the management’s attention.
On key man risk, CEO Piyush quipped that he would want to be around to oversee DBS completing its transformational journey.

In its core consumer and SME markets (Singapore and HK), DBS was able to preempt disruptors by helping customers to adopt digital behaviour and tying them to its platform.
Digital customer is growing faster and has higher ROE (27%) vs. traditional (19%). Consumer and SME income grew double-digits, cost-income ratio fell from 49% (2015) to 43% (2017) and ROE was boosted from 22% (2015) to 24% in 2017.

In India and Indonesia where DBS does not have much physical presence, it has launched a distribution model by putting an entire bank in a smartphone. DBS estimates that income in these two countries could register over 20% CAGR, with a potential to contribute c.10% of the bank’s income in five years.
The two countries are loss-making but DBS has an aspirational ROE target of c.10%.

Add maintained. DBS has convinced us on its digital transformation and the resultant positive impact on P&L.
9M17 cost-income ratio stood at 42.5%; we see potential to further reduce the ratio in FY18F-19F.
Downside risk is weaker NIM expansion.

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-11-17

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