If you want to rank the most popular stocks in the Singapore market, DBS Bank (DBS), with the highest market capitalization and the most active trading volume in the entire market, is sure to take a place. DBS's historical stock performance has indeed not disappointed many investors. Since the end of 2011, DBS has accumulated an increase of about 2.3 times, far exceeding the growth of the FTSE Straits Times Index during the same period. Over more than 12 years, DBS has had a compound annual growth rate of about 9.6%, not skyrocketing but steady.

So, $DBS GROUP HLDGS LTD (DBSDF.US)$ Can DBS continue its impressive historical performance in the capital markets in the future? We can find answers from its financial performance. Every time the company releases its financial results, it may indicate a good trading or investment opportunity. But before that, investors need to understand how to interpret its financial performance.

So how should we analyze DBS's financial reports? We can focus on three key points: financial report growth, risk indicators, and shareholder returns.

1. Trend in Financial Report Growth

First, look at DBS's financial report growth. In terms of revenue, DBS's growth has been fluctuating, with consecutive declines after 2018, but it has shown growth for the past two years since 2022.

Looking at net income, DBS's performance is more stable. Apart from a significant drop in 2020 due to the pandemic, the three years since 2021 have seen very stable growth, with net income continuously hitting historical highs.

From the perspective of income composition, DBS's income mainly consists of net interest income and non-interest income. Taking 2023 as an example, net interest income accounts for about 67.8%, with less than 1/3 remaining as non-interest income.

Therefore, the fluctuation of DBS's net interest income is a key factor affecting its financial report growth. The so-called net interest income refers to the interest that banks receive from loans, minus the net income of absorbing savings costs.

This part of the income is mainly related to two indicators. The first indicator is the scale of loans and deposits. The more deposits are absorbed, and the larger the scale of loans, the more interest is earned. In the two-year period from Q4 2022 to Q4 2023, DBS's loan scale remained at around 416 billion SGD, while the deposit scale fluctuated slightly around 570 billion SGD, with overall minimal changes. In Q2 2024, both the loan and deposit scale of DBS increased, reaching a new high in recent quarters.

The second indicator is the net interest margin, which is the difference between loan interest rates and deposit interest rates. The larger the net interest margin, the more money the bank earns. We can see that since the fourth quarter of 2022, with the continuous interest rate hike process in Singapore, DBS's commercial bank net interest margin has gradually increased from 2.61% in Q4 2022 to 2.82% in Q3 2023. However, in Q4 2023, as deposit costs also began to rise, DBS's net interest margin declined to 2.75%, leading to a quarter-on-quarter decrease in net interest income. In Q1-Q2 2024, DBS's net interest margin rose again.

In future financial reports, we can continue to observe whether DBS's loan and deposit scale can maintain stability while showing growth, and whether the net interest margin can continue its upward trend. These are key factors determining its revenue growth rate. If DBS's financial report growth momentum stagnates in the past two years, it may also bring pressure on the stock price.

2. Steadiness of Risk Indicators

The business model of banks essentially revolves around earning interest margins, by absorbing funds from depositors at low interest rates, and then lending out at higher rates. Therefore, banks have very little proprietary capital relative to total assets, resulting in extremely high leverage ratios. For instance, DBS's asset-liability ratio is as high as 91.6%.

The high leverage of banks brings potential high risks, and banks are a crucial cornerstone of the financial system. If banks collapse on a large scale, the entire financial market will be in turmoil. Hence, regulatory agencies have set some rigid requirements for some financial indicators of banks.

The first indicator is the Core Tier 1 Capital Ratio (CET1 Capital Ratio), which is a key indicator of bank financial stability, used to measure the proportion between a bank's core capital (common equity plus retained earnings) and its risk assets. This is a regulatory indicator set by the Basel Banking Supervisory Committee, with a minimum required Core Tier 1 Capital Ratio of around 4.5%. In addition, banks in various countries may have additional requirements for capital buffers, but overall generally not exceeding 11%.

In 2024Q2, UOB's Core Tier 1 Capital Ratio was about 14.8%, significantly higher than the requirements of the Basel Accord, also exceeding regulatory requirements of other banks.

The second indicator is the Non-Performing Loan (NPL) Ratio, which is the ratio of non-performing loans to total loans, also an indicator of loan asset quality. Generally, loans that are overdue for more than 90 days may be defined as non-performing loans. The more these loans are, the more bad debts there may be, and the potential losses for banks could be higher.

In 2024Q2, UOB's Non-Performing Loan Ratio was about 1.1%, slightly exceeding the 1% level, indicating relatively good loan quality.

The third indicator is the Provision Coverage Ratio, which is the ratio between the funds set aside by a bank for non-performing loans and the amount of non-performing loans, representing the extent to which a bank covers potential losses. The higher this ratio, the more the bank focuses on potential loan loss risks, and the more stable its operations are.

In 2024Q2, UOB's Provision Coverage Ratio was around 129%, reserving relatively sufficient provisions for potential loan losses, relatively stable.

For future financial reports, we can continue to observe UOB's Core Tier 1 Capital Ratio, Non-Performing Loan Ratio, Provision Coverage Ratio, and other risk regulatory indicators to see if it can maintain financial stability. If there is an unfavorable trend, we may need to pay more attention.

3. Shareholder Returns

Many well-managed bank stocks are also quite generous in dividends, defined by many investors as income stocks. Dividends reflect the importance a listed company places on its shareholders, and have always been very popular with investors.

The indicator that measures the quality of dividends is the dividend yield, which is the ratio of the dividend amount to the total market cap. The higher the dividend yield, the higher the potential return assuming the stock price remains constant. Of course, since investors also need to bear the risk of stock price fluctuations, the decision to invest in high dividend companies needs to consider other factors before making a decision.

Taking the data since 2010 as an example, DBS has been distributing dividends to shareholders every year, which is relatively friendly. Over the 14-year period, its cumulative dividend amount has reached approximately 34.9 billion Singapore dollars, while the total net income during the same period is about 71 billion Singapore dollars. The dividend total accounts for approximately 50% of the net income, which is considered relatively good as it addresses the need for shareholder returns while setting aside some funds for business development.

In terms of dividend yield, as of mid-April 2024, DBS's dividend yield is about 5%, which is a relatively decent figure. Combined with its good stock price performance in recent years, the historical holding experience may also be favorable.

In conclusion,

When it comes to DBS's performance, we can focus on three aspects: performance growth, risk indicators, and shareholder returns.

DBS has seen continuous growth in revenue and profit over the past two years. However, with the net interest margin no longer rising consistently, its performance growth is also facing pressure.

In terms of risk indicators, DBS's core capital adequacy ratio, non-performing loan ratio, and provision coverage ratio are all at relatively stable levels.

In terms of shareholder returns, DBS has historically been more friendly to shareholders in terms of dividends and dividend yields.