DBS Group Holdings Ltd
SGX:D05
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DBS Group Holdings Ltd
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Please begin.
Good morning, everyone. Thank you for joining our third quarter analyst briefing with our CEO, Piyush; and CFO, Sok Hui. As we have just had the presentation, we can go straight to Q&A. Operator, can you just give the instructions and pass us the questions?
[Operator Instructions] First, we have Rob Kong from Citi Research.
This is Robert from Citi. Can you hear me?
Yes, Robert. Go ahead.
Thank you, and thanks for all the details on the previous call. Just, I'll run with 2 questions, if that's okay. You mentioned, Piyush, on the NIM sensitivity 1 basis point is now $18 million to $20 million because of the -- obviously, the much higher CASA. Could you give us a more holistic guidance on NIM sensitivity? Because obviously, your book is obviously multicurrency. I think it's a very decent -- I think Sing dollar is probably only 40% total loans these days. You've got U.S. dollar, Hong Kong dollar, and all of this, of course, is sensitive. So can you give us a more holistic guidance on what 25 basis points of view across are different books?
And then the second question is just a bit more color on how much cost growth you're expecting. I think the cost base of this quarter is now about $1.67 billion. I just want to get a sense of what kind of growth we should be imputing into that into the coming years. Those are the 2 questions.
On the NIM, I'm going to ask Sok Hui to see if she can unbundle by our currency breakdown. But as you know, the bulk of our sensitivity is -- a large part of it is Sing dollars. We are very, very surplus. But as you also know, in recent times, Hong Kong book turned from being fixed deposits dependent to being heavy CASA dependent. And therefore, we also have positive interest rate sensitivity in the Hong Kong book, which is Hong Kong dollar and U.S. dollar as well. So it's actually quite broad-based. But why don't I leave it to Sok Hui to try and give you some more color.
Yes. So the way we built the overall sensitivity is to take a blended sensitivity to sort of U.S. dollar rate. So the -- I don't have the numbers offhand. We can sort of share with you separately. But I think generally, the rates are correlated to some extent. So you can take the $18 million to $20 million, which has some modeling assumptions as well as to how much of those CASA may sort of convert to fixed deposits, et cetera. So we do use kind of realistic assumptions.
And what I want to highlight is, in the past when we guided to $14 million per basis point, it actually stretched out over a few years. But this time around, as we look at our profile, we are quite certain that the bulk of the $20 million -- $18 million to $20 million impact would actually crystallize largely within the first year, given the profile that we have today. So I guess to translate it for that, we are clear, and there's no miscommunication. So if we see a 100 basis point rate hike, and assuming a $20 million sensitivity, we're talking about a $2 billion overall increase, the bulk of which we should see in the first year.
Your second question was on expense outlook for next year. I think if we can look at the mid-single-digit revenue growth next year, excluding markets, assuming market goes back to normal, we can't repeat markets a rate, expenses might be a couple of percentage points above that. That's my current outlook.
So maybe, Robert, just to elaborate on that, the $1.67 billion is a good baseline per quarter assumption that you could start using, and layer on top of that some of the increments that we will sort of still expect going into next year and some additional investments.
Okay. Just one tiny clarification. The $2 billion overall increase in -- from the 100 basis points, that's a pretax number, right?
That's correct. That's the income line number.
But as we said, that already assumed some assumptions on Fed day to day, how much a flow-through to our various books. It assumed some assumptions on the runoff in CASA. It has some assumptions on how much people might switch back to fix deposits. We've taken some reasonably conservative assumptions in building that model.
Next, we have Aakash from UBS.
This is Aakash from UBS. The first one I have is just some color on the new NPAs and the recovery that you had this quarter. So the $342 million and the $355 million, is there anything other than the airline and the O&G recoveries that you talked about already. So that's the first question.
The second one is, if you can share some more insights into the economics of the digital exchange business. So what sort of revenue per customer, revenue per million of AUM we should expect in the steady state? And then just in general, what are the different sources of revenue on that business? Like what are the different commission rates? And how do you make money there?
And then the third question is on the digital unlocking concept. So I understand your point on transparency. But I think if you look at SCB, the opportunity to unlocking is really when the customer base can be monetized right in a way, which is not happening at the moment? Or there's a growth constraint that can be removed by spinning off the business or if it's a regulatory arbitrage, which you said it's not likely to happen in Singapore. So none of these in my mind seem to be applicable to any of your businesses like if you take Remit in, for example. So I'm just trying to understand, is there anything else apart from transparency that will make you go down that route of spinning off? That's all 3 questions.
Okay. On the NPA, Sok Hui, do you want to take the question?
Yes. So maybe just to context the NPA, so the new NPAs, there's $342 million. If I just look at the top names, you'll find that 75%, right, of the new NPA actually has got the top names, have no make -- almost contributed nothing to SP because we don't expect actually to have to take losses. So one of them is the national airline that Piyush mentioned earlier, the others were actually very well procured. So that's the context sort of the numbers that you see. The airline in question is about 1/3 of the sort of overall new NPA. So I would say probably some headline increase in NPA, but not resulting in material specific provision.
Well to the repayment...
Yes, on the repayments, just a recovery from the oil and gas sector. And you can see because our disclosures are very transparent, we see it in a specific provision line on Slide 11. You see that we removed specific provisions of about $103 million due to settlement. So the repayment is almost the whole amount under settlement. So it's a large settlement or rather a reduction in SP arising from the repayment of this O&G case.
Well [indiscernible] any pattern, the answer is no. So the new NPAs are a little idiosyncratic. There are 2 or 3 of them, which we really don't expect any losses on as so we speak. The – she's talked about the second question, the airline and the oil and gas piece.
In terms of unlocking value, actually, apart from price visibility, there is the opportunity to increase our customers. And the reason for that is if you take some of the capabilities, and payments as one, the retail prices and others, there are a few other capabilities we have. So if you want to start going through other intermediaries to the customer base, it's much harder to do that as DBS Bank because other intermediaries are a little bit more circumspect about dealing with another bank to access the customer base.
But if you can split it out into an entity which is multiple party ownership, where you keep a stake, then you can start accessing much larger customer numbers. Our plan, by and large, on these businesses is a B2B2C idea. So we will go through intermediaries, other banks, other players. And to be able to access their customer bases, it is helpful to be able to spin out and unbundle from the bank. Again, our plan is sometime in the next year to do a more detailed investor session to walk people through what we have, what are the businesses we think we can do this with and how we think we can access growth. But there is a belief that we can access a much bigger customer pool.
Okay. Understood. And sorry, I had one more question on the digital exchange business. If you could share some insights into how you...
Let's say it's kind of premature. But I think the 3 sources of revenue for the business, but we are more detailed of what are the economics and for customer level is too premature. But the economics are on 3 things. The principal one is obviously the trading, the cryptocoin trading, where we obviously like every other exchange, you make a bit of spread on the savings.
The second source of revenues is custody. And so we keep our custody fee as well as a custody, which is actually not different from the rest of the custody business we do with all the other assets that we have. That's actually looking quite promising because there's not just reliance on end customer, investors, other exchanges are seeking us out for our digital custody capabilities, and that's part of the ecosystem.
And the third part of the revenue stream is on the origination and tokenization business. We've done one fixed income. They're only by the proof case. It wasn't material. We need to do another property tokenization in the next few weeks. But as you go forward, we do think that tokenizing and origination of different kind of asset classes will be the third income and revenue source. Like I said, more detail for customer capabilities, et cetera, we'll probably have to wait some time.
We have Jayden from Macquarie.
It's Jayden from Macquarie. I just wanted to get a bit more color on the provision release. So first of all, can I confirm that the surplus provisions have declined from about $800 million to about $600 million? And then secondly, what are the sort of variables that you're looking at that has allowed the release this quarter? What would you be looking at going into next year?
Well, again, we're not proxy to comment on it. But actually, our overlays that we have on top of our model are well north of that. And so you should remember that one of the things we can do -- since we've taken all our provisions through P&L, we could actually release substantial amount of provisions. And then if MAS had a requirement, you could always take it up to RLAR, which is what our 2 local competitors do. They have. We have 0 RLAR. All our provisions are to the P&L line. And therefore, we do have the capacity to release a lot more than other people do. But Sok Hui, do you want to comment?
Yes. So I'll just make a few points. First is that in 2020 we built up $1.7 billion in general allowances. So obviously, some of that, in the course of this year, $0.4 billion has actually been released. But the overlay portion that we have over and above our -- the models that we use for the baseline is actually quite substantial.
So your next question is -- so therefore, when we compare with our peer banks, we have actually set aside a lot more provisions in 2020 and therefore, we're in a better position to consider the release of general provisions.
You asked what are the variables that we'll consider. So we have prepared a kind of a release framework that takes into account a few factors. We'll be monitoring the -- when the government relief efforts, the moratorium start to roll off, we'll be looking at delinquency trends post that. So the earlier we will sort of be looking at potentially a release would be first quarter next year.
The other variable, because the moratorium will start to roll off by end of this year, although a number of other countries will still roll -- will take time to roll off in mid-2022, and we'll monitor by country.
The other thing that we are monitoring is the opening up, looking at sort of cross border and sort of passenger traffic. And the third thing that we are monitoring is something called stringency, is that how stringent are countries in sort of enforcing sort of restrictions and closures. All this is prepared by Oxford University, is published for every country, and it looks into many dimensions of workplace closures, school closure, transport, et cetera, et cetera.
So based on many indicators we track for each country, Singapore at September was about 47%, Hong Kong and China will be higher. And on a weighted basis, for all our countries are at about 54% at this point. So we'll continue to track. And if the trend continues to improve, then we will be in a better position to frame a response to how much we want to release in general provisions.
Your third question was around the number for the MAS buffer. Last quarter, we said $800 million. This quarter, we said $600 million. But you have to remember that the MAS 1% GP requirement is really a capital construct and just want to make sure that there is sufficient buffer. And that decline really reflects our loan growth. So if the loan growth has happened during the quarter, then it eats into this particular buffer.
But we are not constrained by that because anything up to that $600 million, we actually will see an increase in CET-1, as you would expect, as these general provisions translate into bottom line earnings. If we rightsize more than $600 million up, frankly, our [ CAR] impact will be neutral, right? So to repeat, up to $600 million, we see an increase in CET-1. Beyond $600 million, we actually see a neutral impact to CET-1 because of what we already set aside in terms of general allowances. So that's just to context the numbers that we have given out.
That's really helpful, Sok Hui. Can I just clarify what's the total overlay that you're still holding at this stage, just to get the full number? The points that you raised are very helpful to context.
So we have a few types of overlay, but the one that's most directly linked to the COVID situation in total is about $1.3 billion, and we include all sorts of data points, including unrest and all that. So it doesn't mean that we're going to sort of release the entire $1.3 billion just to context it.
Next, we have Weldon from HSBC.
Can I -- just 2 questions. The first one is on the unlocking thing. I guess the other thing the SCB did was to move some of its consumer businesses separately as well. So can I clarify if this Finnovation is specifically for just the digital platform businesses? Or will you also consider moving some of the consumer businesses? And then second question is on retail wealth. So can I just understand the split in AUM for the mass retail wealth versus private wealth? Can you talk about the sort of strategies between these?
Yes, in terms of what is unlocked, actually Aakash -- Weldon, the question is the great question. So you could unlock and unbundle businesses based on, one, what incremental value would be created by unlocking the business or unbundling that business; and second, by how much it is integrated into our core banking, both in terms of licensing requirements and other requirements.
So as an example, a deposit franchise or a deposit linked business is much harder to disintegrate because of depositor protection rules and et cetera, et cetera. Asset-led businesses tend to be easier to do that bit. If you look at a consumer finance franchise or you looked at one of those things, it would be much easier to try and figure how you could unbundle one of these.
But yes, when you look at -- we show that dotted lines showing other businesses from the bank could move out. That could improve the other businesses like the ones that we mentioned. And again, it's premature to talk about any specific business right now.
Your second question in terms of retail wealth, if you look at total AUM of about $280-odd billion, what is classic comparable to what other private banks, if you look at private banking is, if I remember about $210 billion of that. So the balance $75-odd billion is really related to more of mass affluent strategy. Now that includes mark [indiscernible] and also a little bit of mass affluent. I don't have the split between those 2. But the real mass part of that, which is the retail, small ticket, regular spending, digital portfolios, that's been growing very nicely. And even in this year, our actual new money has come into that component, the real retail part of it has actually been very good, it's much smaller. The mass affluent is the bigger part of the $75 billion.
Next, we have Nick from Morgan Stanley.
A couple of questions for me. First of all, I'm just trying to get my head around fees. I mean, obviously, it's been a very strong performance now for this year, and you're indicating a double-digit growth next year as well. I guess, historically, if I look at fee growth, we've seen something in the region of 5% to 10% fee growth.
Obviously, you've spoken in the meeting before about a lot of, sort of things that are happening in terms of drawing it like the digitalization of customers and investments in wealth. So I'm just trying to get an idea. I mean are we seeing double-digit fee growth at the moment, partly helped by cyclicality and the low rate environment and all that stuff? Or do you now think we've moved into an area where just the changes you've made in the business can drive double-digit fee growth consistently over the medium term? So I'm interested in sort of your views on that. And then secondly, I just wonder if you could give us a bit more detail about the China consumer business, sort of how you're originating loans? What size of that book is? What your ambitions are there?
Yes. Nick, so on the fee thing, I think there's a secular change in the nature of our ability to be able to generate fees. Now how much of the double-digit is secular, how much is cyclical, I'm not 100% sure myself. I say, without a doubt, we've seen some meaningful pickup in the secular part of that. So whether it gets to consistently double digit or whether winds up at 8%, 9%, not entirely sure yet.
But the volume that -- remember, fee is a function of -- can you -- what volumes come through and can you charge for them? No, we've not changed the rate of fees. The bulk of our fees did comes from volume growth. And that's been broad-based. The volume growth for payments, for example, because of the digital and the API linkages we made, has been very material over the last 18, 24 months. Similarly our trade finance. We've plugged into so many of these platforms and we've plugged into so many supply chains, anchor-driven supply chain, so the volumes we're getting on that are quite material.
And on the payment space that I talked about earlier, our payment volumes have continued to increase substantially, both in the corporate cross-border payments as well as the retail cross-border payments. So all of this is volume driven, by and large. Cards, this year, of course, has been an opening up story. I think that will continue next year. Beyond that, cards might be cyclical. Once you get to a steady state level where the card fees continue to grow at the rate we're going now, maybe not.
And then investment banking. We are -- our investment banking franchise [indiscernible] is not big compared to bulge bracket. But for us, on a year-on-year basis, it could be actually quite material. And therefore, that continues to do quite well. So the long answer to your question. I think there's a secular shift in our fee income generation capability over time.
Your second question on the consumer finance business in China, we're actually not originating there. We're originating through partnerships. And one of the things that is advantageous to us right now is some of the changes in the regulations in China in recent times means that a lot of people who are providing consumer finance are now more limited. There are very few people who have a nationwide license to be able to do consumer finance, we are one of them. And so we continue to tie up partnerships with various origination platforms. We use our own underwriting mechanism. We use our own tools on top of what they use. And we get access to customers, we build the customer relationship as well, but we originate through partnership platforms.
And what sort of -- 2 questions, I guess, what sort of partners do you have? And will you think of doing some of buy-now-pay-later in China?
Well, we have a whole range, so -- I'm trying to remember, this is -- our partnership, this thing is in the topic. For example, we have a partnership with Ctrip. We are doing a lot of origination from them. But we're also talking to several other potential partners. In fact, we just started activity with more partners of that nature.
And when we do this, we have the opportunity to originate in the micro SME or on the consumer side. So we have a choice of what we want to do. So far, we've been focused on the consumer end of that. There's been very specifically transaction linked and based on our algorithmic underwriting model. Now whether you call that buy-now-pay-later or give it some other names, is less relevant to me. The question is, can you use the data and the transaction flow to do sensible credit underwriting as you put the loan on their book.
Okay. And what size is the business at the moment?
I'm trying to read you some of the numbers. The asset book on the -- I'll get back to you.
Next, we have Melissa from Goldman Sachs.
I have a few questions as well. Maybe just firstly, in terms of your GPs. Some of your peers or both of your peers talked a little bit about keeping a little bit more for the next cycle. What are your thoughts on this? And because I think earlier you mentioned that maybe credit costs or provisions can come around about $100 million next year. Then secondly, in terms of Indonesia, how is the Digibank doing? And how do you see competition given a lot of banks are also into this digital banking space.
Then lastly, just some housekeeping questions. In terms of the margin sensitivity you mentioned earlier, you mentioned 100 bps rate hike, it's about $2 billion overall increase. Is it 100 bps NIM increase or is it 100 bps rate hike? I just wanted to confirm that. And then lastly, just on the Finnovation risk-weighted assets. Do they actually impact your risk-weight assets? And by how much is it impacting if there is any?
Okay. Melissa, so on the general provisions, as Sok Hui said, we've built a lot of overlays and buffers. And like our competitors, we certainly don't plan to release all of them. We think it's prudent to be adequately provided for the future. But I think the 2 or 3 of these we should takeaway.
One, our portfolio is in very good shape and particularly, in terms of our moratorium book, it's much, much smaller than our competitors. We are down about 0.5% of loans under moratorium. We don't have anything in Malaysia, Indonesia, ASEAN countries, et cetera. So our position in that sense is a little bit different.
And second, as Sok Hui just explained, we've taken all of our general provisions through the P&L. We are not allocating any capital to RLAR even now, whereas our competitors do allocate capital from RLAR because they don't have adequate to meet that 1% requirement. So our position is quite different.
Nevertheless, in terms of approach, we have the same approach. We will be prudent in terms of releases and we will try and keep as much cushion as we need for the next cycle.
On Digibank, Indonesia, our actually core business, as you know, we pivoted, we do better quality customers, better range of customers, that business is doing well. And frankly, when we see a lot of digital competition, it is there and not there. A lot of people have made announcement for what they want to do. Many of them are not yet in the market in any material way in terms of scaling up their activity. Our customer journeys are quite good. Our ability is of course quite good, but we've also deliberately been slow because of the environment. We've not wanted to push the asset book in Indonesia in the last 12 months because of unsecured lending in Indonesia in these times is not a smart thing to do. So we've also been deliberately a little bit slow on the asset side of the balance sheet.
On the question around the $2 billion, that's the rate hike. As we pointed out, we've already calculated what the rate hike means in terms of our NIMs, et cetera. So that's a function of rate hike directly.
And your last question was something about RWA credit, I didn't follow it. Did somebody follow the questions?
Finnovation RWA right now.
Finnovation has almost no RWA right now.
Next, we have Nicholas from Credit Suisse.
I just wanted to clarify one thing. In terms of your assets that you have with in -- sorry, the high quality and liquid assets with MAS, I just want to check that these are yielding about 50 bps. And how big is that portfolio?
Yes, I think it's about that, between 50 and 55 is depending on the day of the week. And that portfolio ranges between $25 billion and $30 billion.
Okay. And I guess, beyond that when you're looking at that $2 billion sensitivity on your NIM, does it assume any increase in LDR? Or we should just take it as that existing balance sheet at the moment? So if you do switch out some of these high-quality liquid assets to loans, there's a bit more upside from there?
Yes. We try to assume a constant balance sheet. So yes, there is more upside if we can grow the loan book, that's correct.
Next, we have Harsh from JPMorgan.
A few questions. First is just to understand, rather clarify the comment that negative jaws will narrow. Does it mean that 2022, we still get negative jaws or that was not the intention?
Yes, that was the intention. But you will still get negative jaws with a couple of assumptions as baked in. One is that treasury trading business reverts to normal. In a normal year, my -- the thing -- our treasury trading business is somewhere around $1 billion in revenue. This year, it will be close to $1.4 billion, $1.5 billion. I cannot assume that I will continue to see $1.4 billion, $1.5 billion in savings. So I assume it will go back to normal, right? So that's one.
And the second, I assume that there will be no interest hikes next year. So if both those things happen, I give us some revenues on trading and on the rate hike, and I want to make the investments that I spoke about, then we could get a couple of percentage points or negative jaws. On the other hand, if the markets are kinder or the rates come in, then we won't have negative jaws.
Okay. And this is at the current curve expectation where [indiscernible] is factoring in about, let's say, 2, 2.5 rate hikes in back half of '22?
Correct. But we've not factored them in as well.
You've not factored that in. Okay. The second one is on the, call it, unlock or a broader this thing. Is that to release more capital? Or is it that some of the businesses are probably the kind of scale they need, the kind of operating environment they need is much better outside the bank rather than inside the bank? So is there a business imperative to kind of unlock these businesses? Or is it purely to release capital?
Actually Harsh, nothing to do with releasing capital. We have enough capital, as you know. So the amount of capital the business need, I could allocate it from the bank. But it is for 2 reasons, and I discussed this earlier. One, in some of the businesses, if you want to get customer growth, there's only 2 ways to get growth. Our customer base is limited. We will add all the customers. DBS has about 10 million customers, right?
And so if you want to add more customers, either you go B2C, which means you try and take this business and go direct to market. Now that requires a lot of acquisition cost and a lot of burn. And given the fact we are publicly listed company, unlike many of the teams are privately funded, there's a finite limit on how much you're willing to burn to just acquire consumer customers.
So the alternative is to actually do a B2B2C model, to go through intermediaries who value the capabilities we have and are quite happy to offer those capabilities to their customers instead. But to access that kind of counterparty and partners, it's much better not to be embedded inside of DBS Bank and much better to be a separate standalone entity, which can then actually create different kinds of partnerships with different kinds of people. So there is a business imperative that drives the capacity to scale some of our capabilities.
But second is not a captive but a visibility impact. As I pointed out before that one of my frustrations over the years has been that I have exactly the same businesses as some of the people have outside. But when it's got inside the bank, we don't get the same appreciation for the business. So the hope is that I can demonstrate is that we have superior capabilities, that we have a pathway to grow, then we start getting more visibility or -- so we can raise capital. I would raise capital not because we are short of capital, I would raise capital to demonstrate the value of the business.
Got it. Got it. And you're conducting...
So Harsh, maybe just to say, it's not unlocking capital, but unlocking valuation. That's probably the -- that's a frame to think about it.
A couple others. If you are able to get some of the close some of the Citi assets that you're looking at, then great. But if not, is there a reasonable commitment to go quickly to 13% CET-1 ASAP or not really?
Yes. I mean even if we get some of the Citi assets, we can still -- we would still have so much capital because still go reasonably quickly to that middle of the range. And yes, that is the plan.
Great. Great. And the last one, very distinct. DBS kind of became with some headline between the only bank in the Governing Council of Hedera Hashgraph. Now this is quite cutting edge in terms of sort of blockchain. What does it bring to you as a bank? And is it just one of the many moonshots? Or like how does it -- how are you benefiting from it as in -- I'm just trying to think, are you looking at becoming much bigger player in the DeFi space? Or where does this lead to?
Well, Harsh, [indiscernible] If I look at Hashgraph, I started looking back 2, 3 years ago when they first came to me and the Hedera Foundation, see one of the challenges with the crypto space and Bitcoin in particular is it's very hard to scale that for mass detail of other smart contracts. That's because the mining capacity is need in the latency, you need each transaction are extraordinarily high. And so if we want to use blockchain to make a payment of $5 and those costs are in the settlement and the number of hours we need is too long, it doesn't work.
So over time, we don't have to find alternative ways and better protocols to be able to do that, not just the current method. So proof of stake, proof of ownership, different kinds of algorithms [indiscernible]. Ethereum is doing one, a whole lot roll-out. But I think the Hedera foundation is another very viable way to say we could do this.
This goes back to the question Goola asked in the media session. See what's your view on DeFi. And the fact that I'm not entirely clear of what the long-term prospects of DeFI are for banks like us, so we would have to adapt and be nimble. But certainly, being in the flow, knowing what are the protocols we can use, how do we actually drive the creation of some of the protocols, how do we create the smart contract, I think that can be hugely beneficial.
One of the reasons we're trying to drive the Partior network with JP in the market is exactly that. I think that the settlement system is ripe for change. Partior can do that. Partior also serves as a way to allow CBDC, domestic CBDC settle cross-border. And so it requires a protocol and understanding in having a foot in the door. The Hashgraph and the Hedera Foundation are the same thing, to get a foot in the door, be part of the conversation and be able to learn and influence some of that.
Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.
Thank you very much, everyone. See you next month -- next quarter.