Higher interest rates, China buy and slew of digital assets bode well
Last year, DBS Group Holdings outperformed the Straits Times Index and the market by rising more than 30%. It was also the best performer among the three local banks. Since the start of this year, the bank’s share price is up 8.5%. We reckon that DBS will continue to perform this year. This is why.
First, interest rates are trending up this year, with the US Federal Reserve indicating three to four likely hikes this year. Assuming four rounds of 25 basis points each, that is a 1% hike, which will lift the net interest income of DBS by as much as $2 billion, estimates RHB Group Research. In contrast, the same hike will give Oversea-Chinese Banking Corp (OCBC) an $800 million boost whereas United Overseas Bank (UOB) might see between $500 million and $600 million. With 9MFY2021 already at $5.41 billion, DBS might record a fullyear FY2021 ended December 2021 earnings of $7 billion, versus FY2020’s $4.7 billion.
Besides the lift from higher rates, DBS in FY2022 is likely to enjoy contributions from its recent acquisition: A 13% stake in Shenzhen Rural Commercial Bank for $1.079 billion or 1.01 times net asset value. DBS group CEO Piyush Gupta said this deal was immediately EPS accretive.
The second reason is based on the longerterm outlook around embracing digital assets, distributed ledger technology and blockchain for new and traditional businesses. At the bank’s 1HFY2021 briefing, Gupta said that DBS Remit, and other parts of DBS, if they were listed separately, could garner a valuation of $10 billion. Remit is, according to Gupta, a lot more profitable than Wise, the London-listed FinTech focused on payments.
At DBS’s 3QFY2021 briefing, Gupta announced a company called DBS Finnovation has been set up so that digital assets and activities such as joint ventures in Partior, Climate Impact X and DBS Digital Exchange can come under it. “The structure will allow us to create partnerships, joint ventures or even our own bespoke activities and keep them at arm’s length from the bank,” Gupta says.
The DBS Digital Exchange or DDEX is a digital exchange where the bank’s capital markets team can originate deals, including fractionalising immovable assets such as property into tokens to list and trade on DDEX. Partior
is a joint venture with JP Morgan and Temasek to enable wholesale cross-border payments. In a pilot, Partior, which uses a form of distributed ledger, was able to undertake an SGD-USD transfer in seconds.
Partior is interesting because it aims to be part of cross-border transfers, which at US$150 trillion ($201.7 trillion) or so, is the largest global market. “Partior is meant to be an open network, not a proprietary network. Regarding how the network will evolve, I firmly believe that it will be a network of multiple types of participating institutions,” said Lim Soon Chong, group head of global transaction services at DBS.
“We carry information, and we carry the transfer of money. The best way to think about Partior is that it aims to be the ‘Star Alliance’ of the future for payments, whereby banks are like airlines serving trunk routes, and you have got money service organisations and other financial institutions which just service, I would say for money transfers, regional routes,” Lim explains.
A large part of the US$150 trillion in money transfers is within Asia. Lim says the digital asset ecosystem and trade finance are just two of many areas where Partior can assist in settling digital assets against fiat currency. “In trade finance, with financial and logistic twinning, we can imagine many futures, whereby there will be a greater demand for instantaneous payment and settlement for trade, particularly for open account trade,” Lim adds. He sees Partior as a “truly open, multimodal, or in our case, multi-asset class network”.