It's too bad that more investors don't look to American Depositary Receipts as viable options to invest overseas, as many good companies are available with little sacrifice in volume or shareholder friendliness. One of the names well worth considering is Singapore's DBS Group (OTCBB:DBSDY). While this bank does have some risks in its funding and its growing emerging market businesses, it has built a reputation over the years as a conservatively-run bank.
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Looking To Go 40/30/30
Right now, Singapore is still a major component of DBS Group's earnings base (nearly 60%), with Greater China chipping in about 24% and countries in the Association of Southeast Asian Nations (ASEAN) another 10%. Although Singapore will likely always remain an important operating area, DBS management is hoping to move its earnings base to something closer to a 40/30/30 model - 40% from Singapore, 30% from Greater China and 30% from ASEAN.
One of the big questions is exactly how the company intends to go about that. Right now, DBS Group's Hong Kong business is weak, and it's unclear how the bank is really going to change that. HSBC (NYSE:HBC) has a very large share of the Hong Kong banking business, and Bank of China and Hang Seng are quite large as well.
Organic growth (opening branches and competing for deposits) is a slow-and-steady way of growing a business, but investors tend to be very impatient with that sort of model. On the flip side, acquisitions carry their own risks and challenges, and many banks have wrecked a good business with an ill-timed and mis-priced deal.
SEE: Biggest Merger and Acquisition Disasters
Is Funding a Major Risk?
One of the things that does concern me about DBS Group is the difference in composition between its deposits and loans. In particular, the bank has substantially more loans denominated in U.S. dollars than it does deposits - around 150% as of the last quarter. While this is nevertheless an improvement from past levels, it's still a risk and leaves the component dependent on affordable U.S. dollar wholesale funding.
Funding is also going to be a challenge as the company looks to increase its business in China and emerging Asia. Chinese (and emerging Asian) consumers are famous for being big savers and not such big spenders - which makes it harder for DBS to build up cheap, low-rate demand deposits. This is hardly a DBS-specific problem, as many other Asian banks have had to resort to wholesale funding to fill out their deposits.
Taking a Lesson from Other Successful Banks
While DBS Group wants to build its Chinese and emerging market retail banking businesses, the bank is not ignoring other opportunities for boosting profits. Taking a page from U.S. super-regional bank U.S. Bancorp (NYSE:USB), DBS Group is looking to build its ancillary businesses like treasury operations and transaction services. While there is competition here from the likes of Citigroup (NYSE:C) and Standard Charter (OTCBB:SCBFF), this is a growing high-margin business for DBS that carries less risk.
The Bottom Line
I have long liked DBS Group and I still do. That said, the shares are not all that cheap right now. If DBS Group can regain and hold 12% return on equity, these shares ought to be worth something close to $50. Couple that with a solid dividend yield, and these are good shares to hold but not really cheap enough to buy today.
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.