DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-01-05: The Digital Warrior

DBS Group Holdings (DBS SP) - UOB Kay Hian 2018-01-05: The Digital Warrior DBS GROUP HOLDINGS LTD D05.SI

DBS Group Holdings (DBS SP) - The Digital Warrior

  • DBS is recognised as the world’s best digital bank and has launched the mobile-only Digibank in India and Indonesia. 
  • It has the most productive workforce with income per employee at S$538,805 p.a. and PPoP per employee at S$313,701 p.a. as of 3Q17. 
  • It generates solid returns with income of S$4.20 and PPoP of S$2.39 for every S$1.00 invested in staff costs. 
  • Maintain BUY. Target price: S$29.50.



World’s Best Digital Bank. 

  • DBS Group Holdings (DBS) was recognised as the world’s best digital bank by Euromoney Awards for Excellence 2016. It beat competition from BBVA, Citigroup and ING as digital innovation permeates every part of the bank and is deeply ingrained in the bank’s 22,000 staff. 
  • DBS has re-designed its IT infrastructure, leveraging on big data, biometrics and artificial intelligence (AI) to make banking simple and seamless for customers.

Launched Digibank in India and Indonesia. 

  • In Apr 16, DBS launched Digibank in India, the first mobile-only bank that is paperless, branchless and involves no signatures.
  • Customers are serviced by an AI-powered virtual assistant created in partnership with Kasisto, a spin-off from the creator of Siri. The virtual assistant is able to handle 80% of customer requests without human intervention while the balance 20% of customer requests go to live chat sessions. To-date, it has acquired 1.5m new customers and 450,000 savings accounts. 
  • DBS has also launched Digibank in Indonesia in Aug 17.

Re-imaging wealth management. 

  • DBS differentiates its wealth management business through iWealth, its all-in-one online platform to:
    1. conduct banking transactions,
    2. gain research insights and analysis, and
    3. manage and trade portfolio of stocks and funds. 
  • It launched its mobile platform in 1H17. 

Productivity of relationship managers (RMs) has improved. 

  • RMs have access to client info, portfolio review and client analytics on the go.
  • RMs also have access to fast and accurate pricing for foreign exchange and structured products through online platforms without having to call dealers.
  • DBS has the most productive workforce with income per employee at S$538,805 and PPoP per employee at S$313,701 as of 3Q17. It also generates solid returns with income of S$4.20 and PPoP of S$2.39 for every S$1.00 invested in staff costs. (see also: Banking – Singapore - Assessing Productivity And Cost Efficiency)


Maintain BUY. 

  • Our target price of S$29.50 is based on 1.56x 2018F P/B, derived from the Gordon Growth Model (ROE: 10.8%, COE: 8.0% (Beta: 1.1x) and Growth: 3.0%).



DBS Investor Day: The Digital Warrior


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. DBS is creating 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.


Measuring Digital Value Creation


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 and SME businesses in Singapore and Hong Kong. It has analysed its profit and 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 PPoP in 1H17. 
  • Digital customers are more valuable as income per customer is twice as much compared to that from 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 and SME businesses in growth markets, management targets to increase contributions to income from 4% in 2015 to about 10%, representing a 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%.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 29.50 Up 26.100



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