DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-11-20: DBS Investor Day ~ The Digital Warrior

DBS Group Holdings (DBS SP) - UOB Kay Hian 2017-11-20: DBS Investor Day ~ The Digital Warrior DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - DBS Investor Day ~ The Digital Warrior

  • DBS clearly elucidated its mission, digital transformation and financial goals during its Investor Day held last Friday. It plans to grow Consumer & SME businesses in Singapore and Hong Kong at double-digit rates and contribution to income should expand from 44% to 50% over five years. 
  • The Consumer & SME businesses in growth markets is expected to grow at a CAGR of above 20% and contribution to income should expand from 4% to 10%. 
  • Maintain BUY with a higher target price of S$26.10.


Catalysts for digital transformation. 

  • Management scanned its operating environment and reviewed its businesses in 2014 and came to two important realisations: 
    1. Lacked distribution in growth markets. DBS achieved good outcomes for Corporate Banking (income grew at 2009-14 CAGR of 16%), Wealth Management (income and AUM grew at CAGR of 18% and 12% respectively, ranked 6th in Asia), Consumer & SME businesses in Singapore (ranked 1st in auto loans and 2nd in mortgages, cards and bancassurance). However, its Consumer & SME businesses in growth markets, such as China, Taiwan, India and Indonesia, lacked physical distribution and contributed only S$18m or 0.4% of group net profit in 2014.
    2. Competition from platform giants. The world is changing and platform giants, such as Google, Facebook, Alibaba, Tencent and Baidu, have become formidable challengers due to their huge customer base, cost efficiency and ability to scale.

Making banking joyful. 

  • DBS embarked on a digital transformation in mindset and culture to make banking “joyful” through: 
    1. Becoming digital to the core. DBS revamped its IT architecture leveraging on cloud computing and has built the largest application programming interface (API). DBS owns and run its own technology IT infrastructure, insourcing 85% of IT in 2017, compared to previously outsourcing 85% of IT in 2009.
    2. Embedding DBS in customers’ journeys. Create services oriented towards what customers want to do and making banking convenient and “invisible”. DBS brings banking services to the customers, instead of getting customers to visit branches.
    3. Creating a 22,000-strong start-up. DBS has the ideal size, being small enough to be nimble but possesses sufficient scale across various markets. Management encourages staff to take risks and experiment. Employees undergo immersion programmes and participate in hackathons.

Digibank: Delivering an entire bank in a smartphone. 

  • Digibank is paperless, does not require signatures and fully digital, eliminating the need for customers to ever visit a branch. It utilise an AI-enabled chatbot to service customers, leveraging on data for lending and cross-selling. Back-end processes are fully digital and automated, which minimise manpower requirement.
  • DBS has completed Phase 1 of Digibank involving deposits and payments in India during 4Q15 to 2Q16. It has offered attractive interest rates to attract new customers. DBS has embarked on Phase 2 to introduce lending products, such as unsecured loans and residential mortgages, investment and insurance products and remittance services. DBS has also partnered Tally, a leading ERP player in the SME space, to acquire SME customers in India.
  • DBS has subsequently launched Digibank in Indonesia in Aug 17.


DBS’ mission. 

  • DBS aims to create a diversified Asia-centric commercial bank that delivers double-digit growth in ROE and growth rates, leveraging on:
    1. intra-regional trade and capital flows,
    2. urbanisation and infrastructure developments, and
    3. increasing consumption and growing affluence.

Measuring digital value creation. 

  • DBS has developed a methodology to measure digital value creation for its Consumer & SME businesses in Singapore and Hong Kong. It has analysed its profit & loss based on two distinct segments:
    1. digital customers that interact predominantly through online and mobile channels, and
    2. traditional customers that interact predominantly based on offline channels.

Digital customers provide higher ROE. 

  • Digital customers are a sizeable segment and accounted for 39% of DBS’ customer base and 60% of pre-provision operating profit (PPoP) in 1H17. 
  • Digital customers are more valuable as income per customer is twice compared to traditional customers. They are more profitable as cost-to-income ratio is 20ppt lower and ROE is 9ppt higher due to:
    1. lower cost to acquire,
    2. lower cost to serve,
    3. higher income per customer and
    4. faster growth in income per customer.

Setting financial goals. 

  • For the consumer & SME businesses in Singapore and Hong Kong, management targets to increase contributions to income from 44% in 2015 to 50% over the next five years, consistently clocking double-digit growth. 
  • For the consumer & SME businesses in growth markets, management targets to increase contributions to income from 4% in 2015 to about 10%, representing 5-year CAGR of above 20% and eventually achieving ROE of above 10%. For other businesses, such as corporate bank, wealth management, markets and other businesses, management focuses on improving operating efficiency and reducing costs so as to enhance profitability. 
  • Overall, management targets to improve ROE by 2.5ppt to 13.5%.


  • We raise our net profit forecasts for 2018-19 by 4.4% and 6.2% respectively due to improved operating efficiency and cost reduction brought about by the digital transformation.


  • Maintain BUY. Our target price of S$26.10 is based on 1.38x 2017F P/B, which is derived from the Gordon Growth Model (ROE: 10.5%, COE: 8.0%, beta: 1.1x, growth: 1.5% (previous: 1.0%)).


  • NIM expansion from higher interest rates in Singapore and Hong Kong.
  • Improvement in cost/income ratio.
  • Growth from overseas markets, such as China, India, Indonesia and Taiwan, including initiatives in digital banking.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-20
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 26.10 Up 24.400