CEO change at DBS unfolding at an uncertain time

THE appointment of Piyush Gupta as chief executive of DBS in November 2009 marked the beginning of a golden age of sorts for the financial services group.

Under his leadership, DBS expanded regionally, made big investments in technology and reported strong earnings.

It probably did not hurt that Gupta took the helm of DBS at the tail end of the Global Financial Crisis; and is now set to retire just as a profitability-boosting surge in interest rates is coming to an end.

Since end-November 2009, DBS has delivered a total return (dividends re-invested) of 11.7 per cent per annum. Its peers OCBC and UOB returned 8.3 per cent and 7.8 per cent per annum, respectively.

Zooming out a little puts some interesting context to the outperformance that DBS chalked up during Gupta’s time.

Over the last 20 years – which includes a roughly five-year period before Gupta was appointed CEO – DBS achieved a total return of 10.1 per cent per annum.

That was still well ahead of UOB’s total return of 8.9 per cent per annum, but it was not much better than OCBC’s total return of 9.8 per cent per annum.

One lesson from these numbers is that consistency matters. Even a short rough patch can significantly affect returns for long-term investors.

This is why the coming change of leadership at DBS is a seminal moment for the bank as well as the local market – DBS accounts for more than one-fifth of the Straits Times Index.

DBS said on Aug 7 that its board had appointed Tan Su Shan as deputy CEO, in addition to her present role as head of institutional banking. Tan will succeed Gupta as CEO when he retires at the next annual general meeting on Mar 28, 2025.

Tan has been with DBS since 2010, and has the unanimous support of its board as she takes up the mantle.

Said DBS chairman Peter Seah: “Su Shan’s strategic orientation, track record in building businesses, familiarity with technology, leadership ability as well as strong stakeholder management and communication skills make her the ideal successor.”

Looming risks

As an investor, I would be wary of betting on DBS continuing to deliver peer-beating returns as Gupta bows out.

This is not because I doubt Tan’s management prowess, but that she is being appointed CEO at a time when the group’s capacity to generate high returns could be tested by a number of factors.

DBS reported a post-pandemic surge in earnings to record levels in 2022 and 2023. This was partly the result of a 70 basis point expansion of its net interest margins (NIMs) over the two years, as interest rates climbed quickly.

A recovery in non-interest income on the back of higher wealth management fees, card fees and loan-related fees further lifted the group’s earnings last year.

DBS also attributed its strong profitability to structural factors such as the build-out of its private banking business as well as its expansion in India and Taiwan.

Then there was the digital transformation that DBS often talks about. Among other things, this included the use of artificial intelligence and machine learning to generate incremental revenue by anticipating the needs of customers as well as to deliver productivity gains.

DBS noted in its 2022 annual report that its return on equity (ROE) of 15 per cent was higher than previous peaks of 12 to13 per cent. Its ROE in 2023 came in at 18 per cent, which DBS said broke all previous records.

The momentum seems to have continued into H1 2024. For the six months to Jun 30, DBS reported a 9 per cent rise in net profit to a new high of S$5.76 billion.

Its NIMs held steady at 2.14 per cent, and its ROE for the period hit 18.8 per cent.

As interest rates ease in the months ahead, however, the tailwind of expanding NIMs will probably reverse.

While lower interest rates in developed economies could take pressure off Asian currencies, the open economies of Singapore and Hong Kong may be affected by slower global growth and geopolitical shocks.

This could test the asset quality and provisioning policies of Singapore’s banks.

Gupta’s departure may also raise concerns, at least in the short term, about whether DBS will be able to sustain the culture that fostered its transformation over the past decade; and the resilience to cope with inevitable missteps along the way.

Durable valuation?

This brings me to the premium market valuation that DBS has garnered during Gupta’s tenure.

At their close on Friday (Aug 16), DBS shares were trading at more than 1.61 times net asset value (NAV).

OCBC and UOB were trading at 1.16 times and 1.14 times their respective NAVs.

On the face of it, the relatively high market valuation that DBS commands is well deserved. Its ROE last year was about four percentage points higher than those of OCBC and UOB.

At its last annual general meeting, DBS indicated that it is confident of maintaining its ROE at between 15 per cent and 17 per cent, even as interest rates and credit costs normalise over the medium term.

DBS is not the only Singapore bank working to sustain its recently elevated ROE, though. Last week, UOB outlined its strategy to achieve a medium term ROE of 14 per cent.

UOB reported an ROE of 11.9 per cent for 2022, 14.2 per cent for 2023, and 13.7 per cent for H1 2024.

While the market grapples with the question of whether Tan will be a worthy heir to Gupta’s legacy, the less richly priced shares of DBS’ peers might offer better risk-adjusted returns.