Okay – I know I just talked about DBS Bank last week. But then DBS shares dropped 6%+ on Monday alone. And then DBS CEO Piyush Gupta, who many credit with DBS’s outperformance the past decade, announced his retirement. All while DBS announced a strong set of Q2 earnings – and yet stock price […]
The post DBS CEO Piyush stepping down: Will I buy DBS Bank Stock at 6.4% dividend yield? With Piyush Gupta leaving and recession risk? appeared first on Financial Horse.
Okay – I know I just talked about DBS Bank last week.
But then DBS shares dropped 6%+ on Monday alone.
And then DBS CEO Piyush Gupta, who many credit with DBS’s outperformance the past decade, announced his retirement.
All while DBS announced a strong set of Q2 earnings – and yet stock price remains weak due to fears of a US recession and rate cuts.
DBS Bank is a hot favourite with Singapore investors, so I figure let’s take a second look at DBS Bank with all the latest developments.
DBS CEO Piyush Gupta to retire at next AGM on 28 March 2025
There has been speculation on this for years.
But we finally have the formal announcement – longtime DBS CEO Piyush Gupta will step down at the next DBS AGM on 28 March 2025:
Singapore, 7 August 2024 – DBS announced today that the Board had appointed Tan Su Shan as Deputy CEO, in addition to her present role as Group Head of Institutional Banking. She will succeed Piyush Gupta as CEO when he retires at the next annual general meeting on 28 March 2025.
DBS Bank’s share price has done very well under CEO Piyush Gupta
I don’t think this will be controversial.
But I think much of the outperformance for DBS the past decade can be attributed (in some way) to Piyush Gupta.
According to Bloomberg, during Piyush’s 15 year tenure, DBS Bank was the second-best performer on the Straits Times Index (400% return including dividends).
Here’s the Nikkei:
Gupta, who assumed the top position at DBS in 2009 after working for 27 years at Citigroup, is credited with growing the former state-owned bank into Singapore’s largest listed company, while transforming its corporate culture and technology to push for digital banking reform.
I’ve plotted DBS’s share price since 2009 below, against UOB (blue) and OCBC (orange).
This is dividends adjusted, and you can see how DBS’s share price has done very well relative to the other 2 local banks.
In fact ever since 2020’s COVID crisis, DBS has outperformed both UOB and OCBC bank.
Who is new DBS Bank CEO Tan Su Shan?
Per DBS’s announcement:
Tan, 56, brings solid credentials to her new role, having had more than 35 years of experience in consumer banking, wealth management and institutional banking. Besides Singapore, she has worked in major financial centres such as Hong Kong, Tokyo and London.
Tan joined DBS in 2010 and spent the first three years building the foundations of the Wealth Management business. She subsequently spent almost equal lengths of time managing the Consumer Banking/ Wealth Management and the Institutional Banking businesses, which account for 90% of DBS’ income. Tan led the day-to-day efforts to operationalise the bank’s digitalisation strategy across the businesses she ran. She has been President Commissioner of DBS Indonesia since 2014.
You can see her linkedin profile below for reference:
What happens to the share price after a high flying CEO retires?
No doubt she is highly capable, but to take over from a CEO who has done very well in their tenure is never an easy task.
And generally speaking – the track record after a former high flying CEO retires is pretty mixed.
Examples where new CEO does poorly
There are many cases where the new CEO does a terrible job.
Think Jeff Immelt taking over from Jack Welch at General Electric.
Apple after Steve Jobs first departure in 1985.
Microsoft after Steve Ballmer replaced Bill Gates.
Same thing in sports.
Think of Manchester United after Alex Fergurson, Arsenal after Arsene Wenger (okay this is controversial), and you get what I am trying to say.
The new CEO Tan Su Shan has big shoes to fill, and she will need to absolutely hit the ground running.
Examples where new CEO does well
Of course, I’m not saying it’s an impossible task.
There are definitely examples where the new CEO builds on the former CEO’s legacy and takes the company to new heights.
Tim Cook is a great example – building on Steve Jobs legacy and actually improving on it, building Apple into the juggernaut it is today.
So it’s not impossible, and it will depend very much on the abilities of the CEO.
DBS trades at a premium valuation today – is this justified without Piyush Gupta at the helm?
I’ve compared DBS’s valuations against UOB Bank and OCBC Bank below.
DBS trades at a 1.46x price / book value, significantly higher than both UOB Bank and OCBC Bank.
Metric
DBS Bank
UOB Bank
OCBC Bank
Return on Equity (%)
18.2
12.2
14.5
Forward Dividend Yield (%)
(estimated)
6.4
5.9
6.2
Price to Book Ratio
1.46
1.09
1.10
Of course, many would argue that this is justified by DBS’s market leading 18.2% Return on Equity (ROE), which puts it ahead of many global banks like JP Morgan (16%), HSBC (13%), Standard Chartered (7%).
Which then leads to the question.
How much of this higher ROE is due to Piyush Gupta, and how much of it is due to DBS’s structural advantages.
Or to put it more simply – Can the new CEO maintain this outperformance (relative to UOB / OCBC Bank)?
My Personal View? Key challenges for new CEO to solve:
And the way I see it, there are 3 big challenges to be solved by the new CEO:
Solve tech issues
Return Excess capital to investors
Maintain record profits / ROE – while heading into lower rates environment + possible recession
Solve DBS’s Technology Issues
The first 2 are the low hanging fruit.
As a Singapore investor, you would know that DBS has been penalised by MAS multiple times for technology failures (internet banking down, atms not working etc).
This has led to Piyush Gupta taking a 30% cut in variable pay after stalled ATM transactions and digital-banking outages.
While MAS penalised DBS and increased its RWA Operational Risk Multiplier to 1.8x.
And yet $606 million spent under the head of “computerization” in the first half of 2024 is 7% less than in the previous six months.
The new CEO needs to fix this, and ensure no more disruptions going forward.
Enough said.
Return Excess Capital to investors
Again, another happy problem to have.
DBS runs a CET1 ratio of 14.8 (this basically shows how much high quality capital the bank has relative to its risk weighted assets).
After removing the tech penalty, it stands at about 15.6.
The “recommended” CET 1 ratio is 13%.
This means DBS has about 2.6% excess of CET1 ratio, which works out to almost $10 billion.
The new CEO can use this excess capital to finance a big acquisition, or return to shareholders in a giant dividend.
Again this is low hanging fruit, and it is an easy win for the new DBS CEO.
Maintain DBS Bank’s record ROE – while heading into lower rates environment + possible recession
But the third one.
Boy… this is where things get tricky.
DBS share price has sold off due to macro fears
Sometimes as management you can do everything right.
And yet your stock still sells-off anyway, due to factors beyond your control.
That’s exactly what is happening today.
DBS’s share price has dropped almost 13% from the top – in just 4 weeks.
This is largely due to a combination of fears of:
Potential US recession
Interest rate cuts (as a response to US economic slowdown)
DBS’s 2Q earnings breakdown – Are bank earnings starting to peak?
In last week’s article – we talked about how bank earnings may have peaked in 1Q 2024.
DBS’s 2Q net profit is down 5% quarter on quarter, which does back up these fears.
Net profit numbers for DBS Bank, UOB Bank and OCBC Bank below.
You can see how net profit for all 3 banks have been coming down from Q1 highs.
Metric
DBS Bank
UOB Bank
OCBC Bank
Net Profit Growth (%) (YOY)
4
-1
14
Net Profit Growth (%) (QOQ)
-5
-5
-2
Net Interest Margin (%)
2.15
2.05
2.20
But… have bank earnings truly peaked?
That being said, if you dive deeper into the numbers it’s a bit mixed.
For DBS Bank – Net Interest Income is actually up 3% QOQ.
Loans are down 1% on a quarter on quarter basis though.
Fee income remains strong, but again down on a quarter on quarter basis.
For reference, these are the numbers for DBS Bank compared to UOB and OCBC Bank:
Metric
DBS Bank
UOB Bank
OCBC Bank
Net Profit Growth (%) (YOY)
4
-1
14
Net Profit Growth (%) (QOQ)
-5
-5
-2
Net Interest Margin (%)
2.15
2.05
2.20
Return on Equity (%)
18.2
12.2
14.5
Price to Book Ratio
1.46
1.09
1.10
Forward Dividend Yield (%)
(estimated)
6.4
5.9
6.2
Non-performing Loan (%)
1.1
1.5
0.9
Dividend Payout Ratio (%)
50
51
50
How to interpret this? What is the impact on DBS if interest rates go down?
If you’re bullish on banks you would say that DBS Bank can continue to maintain current profit levels even if interest rates go down as:
Loan growth may start to pick up with lower rates
DBS can pay a lower interest on deposits to maintain NIMs (steeper yield curve helps)
Non-performing loans remain low
Fee income remains high
For the record – I agree with all of that.
The key assumption with the above though – is that there is no recession.
Once there is a recession, all the assumptions above go out the window.
Feds may cut rates aggressively, and non-performing loans may tick up.
Which brings us to the million dollar question.
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Will there be a recession?
I discussed some of this in the Monday article, so do check it out for further views.
Latest US data is pointing towards elevated risk of a recession.
US unemployment is a full percentage point higher than the lows.
Under the surface, many data points continue to weaken:
The Sahm rule has also triggered (the Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months).
The Sahm rule has a 100% hit rate over the past 40 years, and did not trigger in other soft landings like the 1995 rate hike cycle.
Is a recession a done deal?
In my view – much will depend on how policy makers (including Jerome Powell) react in the months ahead.
And on that note, the market is pricing in very aggressive rate cuts of:
0.5% cut in Sep
Full 1.0% in cuts by end 2024
2.0% in cuts by mid 2025
Will Powell deliver?
And if he delivers, will this be enough to avoid a recession?
And how will these rapid rate cuts impact DBS Bank’s record profits?
I don’t know the answer – but I do know the new CEO is going to be taking over at a very interesting time for DBS Bank.
US Banks have not sold off in a big way (yet)
What is interesting though, is that US bank stocks have not sold off in a big way yet.
Here’s the US finance sector, and yes they are down from their highs.
But they are trading at March/April levels.
Whereas if markets were truly expecting a US recession, you would see US bank stocks much lower than where they are.
Will I buy DBS Bank Stock at 6.4% dividend yield?
There’s basically 2 parts to this question.
The first is a micro question – without Piyush Gupta at the helm, do I still want to overweight DBS Bank, or do I want to diversify into UOB and OCBC Bank.
The second is a macro question – with elevated recession risk, do I still want to own as much bank stocks?
Will I buy DBS Bank Stock at 6.4% dividend yield? With Piyush Gupta leaving
In the past I usually overweight DBS Bank among my bank stocks.
I’m not so sure if I will do that going forward.
I’m happy to be proven wrong, but in most of the cases of taking over from a high flying CEO.
I find that the results tend to be mixed.
And with DBS already delivering a 18.2% ROE today, how much will the new CEO be able to deliver on improvements, relative to market expectations?
Structurally DBS has a lot of advantages today, but will the new CEO be able to build on that to take the bank to greater heights?
Don’t know, and I haven’t made up my mind on this one – but I will be watching closely.
Will I buy DBS Bank Stock at 6.4% dividend yield? With recession risk?
The second is a macro question – how much banks do I want to own with recession risk elevated?
You know after the sell-off in bank stocks this week.
This actually improves the risk-reward for banks (assuming we avoid a recession).
At $38 I struggled to see the upside for DBS Bank.
At $33, well it could easily recover to $38 if there is no recession and that’s a 15% upside together with the current 6.4% dividend yield (total return of 20%+).
So the sell-off this week has changed the risk-reward for the banks, vs just one week ago.
Closing Thoughts: What is the upside for DBS Bank with no recession?
At current price, DBS pays a 6.4% dividend yield assuming dividend stays flat.
DBS had previously committed to a $0.24 dividend raise per year for the next 2 – 3 years.
If so, that works out to a 7.8% dividend yield in 2026, if you buy DBS at today’s price.
Given DBS’s payout ratio is only 50%, I think that’s achievable as we don’t see a sharp drop in profits (which of course requires that we avoid a recession).
So yeah… in the no recession scenario, I think there could be decent upside for DBS Bank.
The million dollar question now is whether we get a recession or if policy makers cut fast enough to avoid one, and the jury is still out on that one.
Whatever the case, I share full changes to my personal portfolio on FH Premium, and I’ll share regular updates as and when I decide to buy DBS Bank (or sell).
We’re heading into a very interesting period for global investors, and I would expect to see plenty of investing opportunities in the months ahead arising from the current volatility and rising recession odds.
There have been huge moves in stock prices the past 2 weeks, with lots of opportunity in markets.
I just updated my stock and REIT watchlist on the names that I am keen to buy, do sign up for FH Premium if you are keen.
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Okay – I know I just talked about DBS Bank last week. But then DBS shares dropped 6%+ on Monday alone. And then DBS CEO Piyush Gupta, who many credit with DBS’s outperformance the past decade, announced his retirement. All while DBS announced a strong set of Q2 earnings – and yet stock price
The post DBS CEO Piyush stepping down: Will I buy DBS Bank Stock at 6.4% dividend yield? With Piyush Gupta leaving and recession risk? appeared first on Financial Horse.
