DBS share buyback raises questions on capital management as counter hits all-time high 

DBS has been active on the capital-management front in recent years. It raised dividends in tandem with profit growth, and issued bonus shares after the release of record 2023 results.

Its latest move is a S$3 billion share-buyback programme on the back of strong third-quarter 2024 earnings, with a promise that the move will raise earnings per share (EPS) and return on equity (ROE).

Under the programme, the bank’s shares will be purchased in the open market and cancelled. The bank has not given further details on the buybacks, except that they will be carried out at the management’s discretion, subject to market conditions.

The market welcomed the news. DBS shares, which have already hit new records this year, soared higher.

After the announcement on Nov 7, the counter climbed 6.9 per cent that day, which bodes well for when the shares will actually be bought back.

The price went as high as S$42.98 on Nov 11, and closed at S$42.34 on Wednesday (Nov 13).

While investors sit on handsome gains, shares of DBS are now the most expensive they have ever been, which means the lender will have to fork out more for the buyback than before.

EPS, ROE boost

Share buybacks are typically conducted when a company has plenty of cash, and when the company and stock market are financially healthy.

Although the current environment is still positive, the practice may not be sustainable in the coming years, especially in a volatile environment amid a Donald Trump presidency.

Indeed, share buybacks will likely boost EPS and ROE, which will help DBS keep its ROE within its targeted range of 15 to 17 per cent in the next three to five years. DBS’ ROE for the first half stood at 18.8 per cent.

But some observers point out that buybacks do not intrinsically improve the lender’s operations.

They also contrast this with DBS’ earlier move to issue one bonus share for every existing 10 ordinary shares held. In February, the bank said the bonus shares were aimed at increasing the pace of capital returns to shareholders.

DBS chief executive Piyush Gupta added then that there would be more opportunities for other forms of payback in the future, and even mergers and acquisitions (M&As), given the bank’s ample excess capital.

On the capital-management front, M&As would grow the underlying business – which also boosts EPS and ROE in the longer run.

With a lower interest-rate environment, it may be time for DBS to look more closely at investment opportunities. It is already rumoured to be eyeing a stake in Malaysia’s Alliance Bank, in a deal currently valued at about US$460 million.

Still, cross-border M&As come with their own set of risks, such as delays in getting regulatory approval and integration risks.

The share buyback could be a sign of there being few attractive opportunities in the M&A space that appeal to DBS.

Another possibility is for the lender to pay more dividends. DBS has around 2.8 billion outstanding shares, so S$3 billion in excess capital could guarantee each share at least S$1 in additional dividends.

From a shareholder’s point of view, higher dividends bring more direct benefits in that they put cash in their pockets, as opposed to the potential lifts to EPS and ROE as a result of share buybacks.

Competitor bank OCBC seems to be leaning towards dividends and M&As for capital management.

UOB said it was open to all options, including more dividends, share buybacks and M&As.

Granted, DBS has already tried various ways to return excess capital.

Apart from the bonus issue in February, the lender is still stepping up its dividend payouts. DBS deputy chief executive officer and CEO-designate Tan Su Shan affirmed that the lender will continue to pay out more to shareholders the more it earns.

Even after accounting for the share buybacks, DBS still has S$3 billion to S$5 billion in excess capital to use, Gupta added.

This is a comfortable financial position to be in. But given the backdrop of Trump’s second presidential term in the US, markets are expecting inflationary policies, which may mean tighter monetary policy may return sooner than expected.

Higher rates should benefit net interest income and margins at DBS, although they also raise the risk of recession, given current geopolitical tensions.

To the question of whether DBS can put its capital to better use than buying back its shares at all-time high prices, that answer is still not clear.