Comments on DBS

Unlike property investment holding companies which are valued on the income generated from their properties (cap rates) and their market values, a generic bank makes money through lending-deposit spreads. In an environment where cost of money is low, but lending rates are high, banks make higher spreads and operating income/int income.

The only issue with banks are their loan losses - where non performing loans have to be provisioned/written off. In normal business operations, thus, banks should be valued on a PB basis where a higher rating would be given for a higher ROE. But when biz conditions worsen like currently, the NPLs will high costs and there is higher risks of lower ROEs and in deep cycles/poor lending practises - losses could ensure. To the extent that these losses eat into their banks' core capital, the bank wld have to raise money (e.g Citibank) Singapore banks are well capitalised, unlikely to see big loan losses since there was plenty of time to restructure the loans, and in worst case - could run into losses for 1+ years - but does not detract from their medium term earning capacity. Thus, I would say banks should not trade at big discount to NTA : its a recurrnet income model and barriers/competitive position of banks are better than ever. In asian crisis where conditions in Asia were really bad, banks are worst traded at 0.8x book and outperformed the market.

Pearly Yap