Thursday, October 17, 2019

6 Reasons Why DBS Is Prime For Shorting

DBS is scheduled to be the last bank among the 3 giants to announce its Q3FY19 results on the 11th November 2019.

The other two banks will report on 1st Nov (UOB) and 5th Nov (OCBC) respectively.

As some of you might know, I have a short-sell position for DBS in my earlier October Portfolio Update and have since more than tripled my position further in DBS in the past recent days.

Here are 6 reasons why I think DBS is prime for shorting, especially in the build up for the next few weeks / months.

1.) SIBOR Rates has peaked in Jun 2019 and are heading down

The 3m and 1m Sibor rates have peaked in Jun 2019 when they announced their 2nd quarter results.

Since then, the Federal Reserve has proceed cutting the interest rates by 25 basis points in each of the two occassions.

This has led the SIBOR rates to come down in the next few months based on what we see from Jul to Oct, which will evidently trickle down to the bank's NIM results.

A lot of people remember the part where banks have been reporting solid year on year growth, but this is because they start from a very low base where QE infinity has been evident almost in the last 10 years.

Party days are almost over, banks will start reporting slower growth in the next few quarterly results, starting from Q3.

2.) NIM is a lagging indicator and has likely peaked in Q2

Net Interest Margin (NIM) is essentially the main backbone earnings for the banks.

It takes up more than two-thirds (around 64% to 66%) of the overall revenue for the banks.

It is a profitability indicators showing how much the bank earns on the interest from its products which includes loans, mortgages, compared to the interests it pays out to consumers on the savings accounts.

NIM is usually a lagging indicator for the banks (usually between 3 to 6 months), as it tends to reprice their rates in relation to how the SIBOR moves in order to remain competitive.

DBS's NIM in the last 10 quarters

Based on the above graph that we see for DBS' NIM in the last 10 quarters, it appears that NIM has peaked in Q2 2019.

The declining SIBOR (see point 1) from Jul to Oct 2019 will likely mean that the banks' NIM rate is likely to decline in Q3, though likely they will still exhibit year on year growth.

If we start seeing NIM slowly going back to the 1.80ish% and 1.70%ish, it will likely show negative year on year growth for the banks.

3.) Mortgage & Construction Loans will continue to drag

Mortgage Housing & Construction loans took up the highest percentage of loans for DBS in terms of industries.

In third place, manufacturing sectors took the place.

As we all know, developers have a hard time selling their newly launched units on the primary market due to the cooling measures that was strictly imposed to home buyers.

As a result, what we have is excess baggage inventory of unsold units that will flood the markets with its "not-so-cheap" price tag.

With banks trying to win consumers on the refinancing segment, this will push rates down competitively, which will be a double hit since SIBOR is coming down.

4.) General Provision Allowances Have Increased

One good metrics to know if cracks in the economy are starting to show is to look at the general provision on the allowances that banks typically does (and also the NPL of course).

While NPL is still showing a healthy 1.5% compared to the 1.9% we see back in 2016, banks are starting to show some conservativeness by putting in more allowances in their books, in preparation of a tough 2020 year to come.

Some of the sectors that see an increase in provision is the manufacturing sectors (QoQ) while almost all the other sectors including construction and housing, e-commerce, transportation are exhibiting year on year increase in allowances.

5.) DBS' Rich Valuations only held up because of its $1.20 dividends

DBS' rich valuations of P/BV 1.4x is unlikely to be warranted at the current market if not for the fact that the Group decides to increase its payout ratio to above 50% from 2017 onwards.

Since then, the market has priced in valuations based on what they think is sustainable yields at 5%, which is attractive especially for yield-hungry investors.

Previously before the hike, banks are trading at sub-par 3%ish and markets are valuing the banks lower.

Having said that, I think the $1.20 dividends / year are sustainable for now because of the competitive CET-1 operating metrics that are above 13.5% (management has previously guided that for as long as CET-1 is above 13% dividends are safe), though we should continue to keep a lookout for any developing updates on this metrics.

6.) If Dragonfly Doji (candlestick) doesn't hold today......

On the 17th Oct, DBS exhibits a Dragonfly Doji candlestick pattern where they open higher, but was pushed on a sell-down during the mid day to $24.66, but managed to gap up strongly at the close.

While this signals a positive uptrend reversal, a confirmation is required on the 18th Oct (today) if demand can continue to push up and end the day strongly.

Likely the case is that we probably won't see that happening today due to the China GDP's info which disappoints this morning and pushed the whole market down.

Final Thoughts

The next two quarters results on high level will still look great for banks as they are likely to report high single digit earnings due to the lower base of 2018 earnings.

But the outlook will be very much tougher as we already see almost all operating metrics showing up to be what will be a difficult year for banks come 2020 when they start comparing against a strong 2019 peak earnings.

Until then, I think banks will continue to struggle and they are likely to be pushed further down from their current valuations that the market is still not realizing the impact.

Thanks for reading.

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  1. Don't forget a lot of DBS loans come from HK and China - so any economic slowdown is going to hit its business as well

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  2. uncle168:

    why temasek save keppel?

    because keppel borrow a lot of money from dbs

    why cpf ask everyone to transfer oa to sa?

    why gls not included in the budget?

    shorting anything that is linked to temasek is like betting the cpf board would run out of money and the gov land is worthless

    u are lucky to own a property that is fully paid but now u cash it out to speculate in derivative

    odds are u will become bankrupt soon when the tide turns against u

    Markets can stay irrational longer than you can stay solvent...


  3. uncle168,

    you are good man i want to save u b4 u go bankrupt


  4. uncle168,

    uob and its related companies have never touch reits

    now it is going to have us supermarket reits

    this is the signal the reits bubble is going to burst

    be careful especially to dividend warrior

    the reits are also taking advantage of ridiculous high unit price to sell equity to raise funds to buy properties all over the world at high valuation thinking interest rate would never spike like when oil prices was more than US$150 it would never fall to less than US$50


  5. bro, did you set a short sell limit as DBS price went up. DBS is a strong fundamental counter and shorting it is risky. fed just announced the cut of 25 percent point.

  6. uncle168,

    u will be shocked when dbs announce its profits

    somehow over the years it was able to hide its massive npls

    if u had not noticed all the GLCs borrow from dbs especially the reits borrow like no tomorrow

    even the sembmar going to collapse dbs say never mind i lend to u because no need to return

    temasek is the mother no money can extend retirement age to 168 years old

    sometimes i wonder why u become singaporean when indonesia is a much bigger country with a brighter future with its high birth rate when singapore is just going to end up like japan

    capitalism is a road to nowhere

    look at our birthrate it is dropping to zero

    you should have brought a resale hdb flat and remain a pr so u can go back to indonesia when a political shift to the opposition emerge in the next sg elections due to a class war between the middle class shift to the opposition against the rich and poor for the pap

    singapore 10 years from now would be in situation similar to western developed countries with a divided government and higher taxes and narrowing income gap as the new government push for the return of taxes on the rich like estate duties and capital gain taxes

    banks in the future would be like telcos now difficult to make money as government tax bank interest dividend to stop the rich borrowing cheap money from the bank that take money from the poor and give them only 0.05% deposit rates

    1. Thanks for your opinions but there are many points which I disagree on and I would prefer to have my own opinions especially on converting to Singaporean which is more than just economically driven.

  7. uncle168,

    banks are black boxes, nobody can understand their financials, its all financial engineering like having a bad bank to take in toxic assets whatever that means

    then the gov pass a law to make that legal

    its like in the past companies book their property assets at cost the price they paid to buy the property and only realise the actual current value when they dispose the asset which is more prudent

    now they change the accounting rules that you can revalue it every year and book the gains in the p&l

    with this new rule, reits can pump up their borrowing with each revaluation gains, with handsome paid property valuator the sky's the limit for property valuation, the banks readily lend them more money to burn, buying decades old building beyond repair in europe and the usa and painting a picture of up to 8% yield when the fed rate is less than 2%

    banks lend out trillions of depositors money, how much do you think they can get back?

    all the banks have to do is to rollover the loan with a larger loan with longer tenure and higher interest to keep the dream alive

    most of the loan given out will never be repaid, that is why the deposit insurance is now S$75K from S$50K

    most of our money deposited in banks will be gone when the property bubble burst due to oversupply when more private and hdb becomes vacant when the pioneer generation becomes extinct

    banks are good investments if you can eat concrete and steel bars


  8. Update: Took a cut loss at $26.31 after the share price burst thru the $26.30 resistance in the afternoon, which represents a loss of about $1.27 / share.

    While the thesis doesn't change, I think timing was at the wrong entry given how bullish the momentum is on the market at the moment due to the impending signing of the phase 1.

    1. Hi B,

      I applaud your action to update your readers after you sell, particularly at a loss. This way, those readers who followed your call will not blindly hold onto a non-performing call. It also takes some courage to admit one's mistake.

  9. uncle168,

    stick with value investing lah

    your netlink and hour glass call was great advise

    i profit from both :)

    buy and hold and u will never go bankrupt


  10. It shows that trading is tougher than most newbies have thought

  11. uncle168,

    do you believe after he closed all his short position, both starhub and dbs would start to plunge?

    weworks is the beginning of the end of the bullshit sharing economy where startups burn money competing with brick and mortar companies taking away their market share by under pricing them

    this would suddenly create huge vacancies in the office causing rental to plunge

    the end of pmd spike unemployment in singapore collapse in domestic comsumption create huge vacancies in retail malls causing rental to plunge

    us trade war focus shift from china to asean, tariffs in thailand and soon to singapore cause commercial and industrial rental to plunge

    as all the reits rental income collapse, they default and banks force sell their properties but nobody buy

    banks write off trillions of npl and gov initial deposit insurance

    billionaire become only S$75K :)

    starhub next quarter results would worsen as tpg comes in with S$1.68 unlimited data plan

    S$1 billion in debt cut divided to 1.68 cents

    share price plunge to S$1.04 :)


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