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DBS Record Profit Masks Q4 2025 Rate Squeeze · Investor Exchange

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Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
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I have a riddle for you to start things off today. Okay, I'm ready.
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Let's hear it. So it's a bit of a head scratcher.
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How does a bank manage to have its absolute best year in history?
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Right. I mean, I'm talking shattering profit records, ROE numbers that make
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you do a double take while simultaneously stumbling at the finish line with
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a fourth quarter where profits actually dropped by double digits.
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Well, that sounds like a total contradiction, doesn't it? Like a runner breaking
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a world record, but tripping over their shoelaces in the last 10 meters.
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Exactly. And that is exactly what we are unpacking today on the Deep Dive.
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We're looking at the full year and fourth quarter 2025 financial results for DBS Group Holdings.
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And honestly, the source material we have today, the CEO and CFO presentations,
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the performance summary, the press statement from February 9th,
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February 26th, it reads less like a standard bank report and more like a pivotal
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chapter in a business textbook.
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I completely agree. If you peel
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back the layers, this isn't just about one bank having a weird quarter.
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Right. It's a perfect snapshot of a changing economic cycle.
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It is the story of what happens when the easy money era of high global interest
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rates starts to fade and these massive financial institutions have to go back
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to, you know, hustling for their lunch. Hustling for their lunch.
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I like that. We're going to get into that hustle in a minute.
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But first, let's just set the stage.
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Our mission today is to look at this strictly through the investor perspective.
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We aren't just reading numbers. We want to figure out what these numbers mean
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for you if you're the person holding the stock.
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Exactly. Is DBS still a growth monster? Is it becoming a boring dividend play?
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Or is there a red flag hiding in that fourth quarter drop?
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That is absolutely the right lens to take because headlines can be deceiving.
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If you just scan the bold text at the top of the press release,
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you might think everything is absolutely perfect.
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Well, let's start with those perfect headlines. Yeah. Because for the full year
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2025, the numbers are undeniably huge. Staggering, really.
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For the full year, DBS posted a net profit of $11.0 billion Singapore dollars.
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$11 billion. Yeah, that is a record.
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It's hard to even visualize that much cash. It really is.
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And their pre-tax profit hit a new high of $13.1 billion. Wow.
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But the number that really matters, The one that institutional investors look
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at to judge the actual quality of the management team is the ROE.
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That came in at 16.2%.
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Right. Let's pause and unpack that acronym because we hear ROE constantly during earnings season.
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So that's return on equity, right? Right. Return on equity.
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Why is 16.2% the number you're circling?
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So return on equity basically measures efficiency. Okay. Asks a simple question.
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For every dollar shareholders have invested in this company,
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how much profit is the management generating?
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Right. And banking is a highly capital-intensive business.
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You have to hold a lot of money in reserve by law. So usually a bank is pretty
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happy with 10 or maybe 12 percent.
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OK, so getting an ROE above 15 percent. Considered exceptional.
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So 16.2 percent is. It's world class. It means the machine is incredibly well-oiled.
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They aren't just sitting on a pile of cash. They're sweating that asset to generate returns.
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It shows that for the entirety of 2025, they were capitalizing perfectly on
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the market conditions. Okay, so if I stopped reading the report right there,
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I'd be calling my broker to buy more.
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Best year ever. Record profits, high efficiency.
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But we have to talk about the plot twist. Stumble. Right, the stumble at the finish line.
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Yeah, this is where the narrative shifts and where investors really need to pay attention.
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If you ignore the full year and isolate just the fourth quarter,
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so 4Q25, the net profit was actually down 11% compared to the same time last year.
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Down 11%. Yeah, it came in at 2.26 billion.
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That is a significant drop. We aren't talking about a rounding error here.
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Yeah, definitely not. An 11% slide feels like someone slammed on the brakes.
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What happened in those last three months of 2025?
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The environment changed. The tailwinds that were pushing the bank forward for
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the last couple of years, specifically high interest rates, started turning into headwinds.
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And to understand this, we have to look at the net interest income or NII.
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NII. That's the bread and butter of banking, right? It is the simplest part
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of the business model. The bank takes in your deposits and pays you a little bit of interest.
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Then they lend that money out to someone else, a home buyer,
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a business at a higher rate. I don't know.
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The difference between what they pay you and what they charge the borrower is
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the net interest income.
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And for the last few years, as global rates went up, that gap got wider and banks made easy money.
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Exactly. But in the fourth quarter, that party started to wind down.
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Group net interest income fell 4% to $3.59 billion.
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But the number that really tells the story, the pulse of the patient,
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if you will, is the net interest margin, or NM.
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NM. Right. It narrowed by 22 basis points down to 1.93%. Dropping below 2% feels
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psychologically significant for a bank that's been riding so high.
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Yeah, it does. It's a combination of three things hitting at once.
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First, interest rates are actually coming down.
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The documents specifically mention SORA, the Singapore Overnight Rate Average.
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As that rate drops, the bank simply can't charge as much for the loans at issues.
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Right. So the price of their product, which is money, is getting cheaper. You got it.
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Second, there's a currency issue. The Singapore dollar has been very strong.
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OK, but normally as a tourist, you love a strong currency. You do.
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But DBS is a regional bank. They earn money in Taiwan, India.
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When they earn that foreign currency and have to translate it back into a strong
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Singapore dollar for the financial report, the value of those earnings looks smaller on paper.
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Ah, that's the translation effect. Exactly. It's not that the business in India
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is necessarily doing worse. It's just worth less in Singapore terms. Precisely.
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And the third factor is what we call the refinancing cliff.
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Refinancing cliff. Walk me through that. Imagine the bank has a portfolio of
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assets like loans and bonds that were locked in when rates were higher.
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As those mature and the money comes back to the bank, they have to reinvest it.
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But now they're reinvesting it at today's lower rates.
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Ah, I see. So the yield on their assets is dropping faster than the cost of
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their funds. So the bread and butter engine is sputtering.
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If I'm an investor, this sounds terrifying. It can be, yeah.
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If their core engine is slowing down, how on earth did they still hit a record year?
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And more importantly, what is the plan for when rates go even lower?
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That is the aha moment of this deep dive. This is where you see the strategy
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of the bank pivoting in real time. Okay.
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Management knew this rate drop was coming. It wasn't a surprise, so they built a hedge.
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If they can't make as much money lending you money, they are going to make money
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by helping you invest your money.
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You're talking about fee income. Yes. We call this non-interest income.
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While the lending side was struggling in Q4, the fee-based side was effectively on fire.
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Really? Yeah. Commercial book net fee income grew 14% in the fourth quarter alone. Wow.
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And the driver of that was almost entirely wealth management.
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Which makes sense psychologically right. If interest rates are falling...
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I'm not going to leave my cash in a savings account earning less and less.
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I'm going to call my banker and say, hey, find me a better return.
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And DBS was ready for that call. In fact, they probably made the call to you first. Right, right.
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Treasury customer sales, which is basically the bank selling financial products
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like bonds, structured notes, or hedging solutions to clients that rose 13% in Q4.
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And if you look at their own trading, their market's trading income for the
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full year, it was up 49% to $1.37 billion.
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We have 49% growth in trading income. Yeah. That is massive.
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So they are effectively acting like a hedge fund and a wealth manager to offset
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the drop in traditional lending. It's a classic pivot.
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You transition from an era of spread income, just sitting back and collecting
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interest, to an era of fee income where you have to hustle and provide services. That hustle again.
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Exactly. And there is one other number in the report that proves this strategy is working.
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Deposit growth. I saw that in the summary.
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$64 billion in net new money. Yes. Record deposit inflow, $64 billion flowed into the bank in 2025.
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That is the highest in the bank's history. But wait a second.
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If rates are dropping...
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Why are people giving the bank more money? Shouldn't that money be fleeing to
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higher yields? It signals a flight to quality. Oh.
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In uncertain times, people trust DDS with their cash.
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And for the bank, this is massive. It gives them liquidity, basically more ammunition.
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Right. Even if the profit margin on each dollar is thinner because rates are
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lower, having more dollars to play with helps make up the difference.
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It builds a moat around the business.
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So the revenue story is basically rates down, fees up.
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Exactly. They are trying to outrun the falling interest rates with higher volume
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and better fees. But we need to look at the risk side, too.
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Always. Because when economic cycles turn, usually people stop paying back their loans.
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Did we see any cracks in the foundation there? There was a, let's call it a blip. A blip, okay.
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And if you just look at the surface numbers in the profit and loss statement, it looks a bit alarming.
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In the fourth quarter, specific allowances, and this is money set aside to cover
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bad loans that have effectively defaulted. That spiked to $415 million.
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That sounds like a lot for one quarter. Usually that number is much quieter.
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It is a sharp increase. But you have to read the fine print in the CEO's presentation
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to understand the context.
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Okay, what does the fine print say? They note that a large part of this increase
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was due to a prudent downgrade of a previously watch-listed real estate exposure.
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Prudent downgrade. That sounds like corporate speak for, we lent money to a
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property project that went south.
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It almost certainly is. Given global trends, it's likely a commercial real estate
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project. But notice the word prudent.
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It implies they are taking the hit now voluntarily.
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They aren't being forced by a regulator to write this off.
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They are choosing to do it while they have the massive profits to absorb it.
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That's what investors call kitchen sinking. Exactly.
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If you have a record year, you might as well throw all the bad news into the
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pot so you start the next year fresh.
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Use the good times to pay for the mistakes. Makes sense. And here is why investors
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shouldn't panic about that $415 million number.
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Despite that one big hit, the overall non-performing loan ratio,
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the NPL ratio, remained completely stable at 1.0%. 1% is incredibly low. It is.
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It means 99% of their loan book is performing perfectly.
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Wow. In fact, they were so confident in the rest of the portfolio that they
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were actually able to write back or release $206 million in general allowances. Okay.
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Can you explain the difference between specific and general allowances?
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Because that always gets a bit technical. Sure. Think of specific allowances
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as money you set aside because you know Uncle Bob isn't going to pay you back. Okay.
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You know the specific loan that is bad. Right. Uncle Bob's loan is dead. Exactly.
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General allowances, on the other hand, is money you save in a jar just in case
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anyone doesn't pay you back because the overall economy gets worse.
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Okay. That makes sense. It's a rainy day fund. Right.
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So DBS basically said we are writing off Uncle Bob's bad real estate loan.
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That's the specific allowance. But when we look at everyone else,
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the broader economy actually looks fine.
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So we are taking $206 million out of the rainy day, the general allowance and
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putting it back into our profit column. That is a very mixed signal, though, isn't it?
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Like, here's a huge charge for a bad deal, but also everything else is so great
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we are releasing reserves. It is mixed, but from an investor perspective,
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it signals deep conservatism.
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They are cleaning the deck for 2026. They don't want that real estate issue
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hanging over them next year.
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Speaking of cleaning the deck and making investors happy, let's talk about the
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part of the report that every dividend investor is waiting for. The payout. The payout.
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With a record profit of $11 billion, did the shareholders get a raise?
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Or did the bank keep it all for that rainy day? Oh, they definitely got a raise.
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This is an aggressively shareholder-friendly report.
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For the fourth quarter alone, the payout is 81 cents per share.
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81 cents in one quarter. Yeah. That's high compared to their history.
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It is, but the structure is what makes it really interesting.
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It isn't just a flat dividend. It's split.
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How so? You have the ordinary dividend of 66 cents, but then they slapped on
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a capital return dividend of 15 cents.
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Why complicate it? Why not just say the dividend is 81 cents?
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What is the practical difference between ordinary and capital return?
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It's all about managing expectations. An ordinary dividend is a promise.
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Once a company raises its ordinary dividend, in this case, to 66 cents,
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the market expects that to be the new floor.
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Right. Companies hate cutting ordinary dividends. It crashes the stock price.
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Precisely. A capital return, however, signals that this is extra.
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The bank is saying we have excess capital right now more than we need by law
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and more than we can efficiently invest. so they are handing it back to the owners.
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By labeling it capital return, they reserve the right to remove it later without
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it looking like a failure. Smart.
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Very smart. So what does the total look like for the year? If you add it all
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up for the full year, the total dividend was three dollars and six cents per share. Wow.
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That is up 38 percent from the previous year. A 38 percent raise in passive income.
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That is going to make income focused investors very, very happy.
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And it gets better. Really?
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Yeah, this wasn't framed as a one-off bonus.
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Management explicitly stated in the outlook that the capital return dividend,
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that extra 15 cents, is intended to be maintained for FY26 and FY27.
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Barring unforeseen circumstances, of course. They always leave in scape hatch.
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Of course they do. But that is still a massive signal of confidence.
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They are basically telling you we have so much capital generation that we can
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commit to paying you this extra bonus for the next two years,
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even though we know interest rates are falling. That's huge.
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For an income investor, that clarity is gold.
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It puts a solid floor under the stock price because the yield is just so attractive.
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And it sounds like they're trying to keep investors loyal even as the overall
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growth slows down. Which brings us to the future.
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We've had the record year. The CEO, Tan Sushan, talks about resilience and adaptability.
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But when we look at the guidance for 2026, are we going to see another record that,
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Or is the party officially over? The short answer is probably not.
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And the bank is being very honest about that.
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The guidance for 2026 is that net profit is expected to be slightly below 2025
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levels. Slightly below.
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That's a definite shift in tone from the last few years of constant double-digit
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growth. Yeah, it is. Is that disappointing for the market? It's realistic.
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Honestly, if they promised growth in this environment, I'd be suspicious.
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Fair point. They are basing this guidance on some very specific assumptions.
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They are assuming SORA, that interest rate benchmark we talked about,
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they're assuming it averages around 1.25 percent.
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Some 0.25 percent. Yeah. That is really low. We are sitting much higher than that right now.
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It is low. It suggests they are preparing for a world where rates fall significantly.
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They are pricing in two Fed rate cuts and potentially more easing locally.
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If rates go that low, the net interest margin will just stay under pressure.
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You simply can't generate the same easy profits from lending at 1.25% that you
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could at 3% or 4%. So if the easy money lending engine is sputtering...
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The pressure is really on that pivot strategy we talked about earlier.
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Yes. The wealth management side has to work. Exactly.
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The guidance says they expect commercial book non-interest income to grow in the high single digits.
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But specifically, they need wealth management to grow in the mid-teens. Mid-teens.
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That is a high bar. Mid-teens growth year after year is hard to maintain.
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You can't just snap your fingers and make clients trade more if the market goes quiet.
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That is the big risk. It is a very aggressive target.
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It implies they have to keep convincing those depositors to move cash into investment products. Right.
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But remember, they have that $64 billion in new deposits.
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Ah, yes, the ammunition. The raw material's there. They just have to convert
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it. They also mentioned cost discipline, right?
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Yes, targeting a cost-income ratio in the low 40s range.
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So the strategy for 2026 is crystal clear.
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Keep costs down, hustle hard on wealth fees to offset the lending drop and use
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the strong balance sheet to weather the lower interest rates.
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It feels like a real maturation of the business.
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They aren't just a proxy for interest rates anymore.
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They are trying to become a true wealth management powerhouse.
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That's the key takeaway here. If you are buying DBS now, you aren't buying a
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traditional spread lender betting on rising rates.
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That trade is completely over. If you are buying a wealth manager and a dividend
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machine, you are buying that 16% ROE and the promise that they can manage your
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money better than you can.
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And with the new CEO, Tan Sushan, coming from a wealth management background,
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the strategy seems perfectly aligned with the leadership.
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It's no coincidence at all. The person at the helm is the one who built the wealth franchise.
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It signals that this isn't just a temporary fix, it's the future direction of
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the bank. It's going to be a fascinating year to watch.
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We've gone from how high can profits go to how well can you defend these profits?
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Defending the summit is often harder than climbing it.
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The air is thinner up there, and there is a lot less room for air.
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Well, before we sign off, I want to leave our listeners with a thought to chew on.
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We've talked a lot today about this shift from lending to wealth management.
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And as interest rates settle into this new normal of around 1.25% or whatever
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it ends up being, the definition of a good bank is changing.
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Is the value of a bank defined by how much it lends to build the economy,
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you know, factories, homes, businesses?
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Or is it defined by how effectively it manages the wealth created by that past
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lending? That's a great point.
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DBS seems to be betting heavily on the latter. Does that change how you value the stock?
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Or even how you view the role of a bank in society? That is the multi-billion dollar question.
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When capital becomes cheap, the value shifts entirely to advice and allocation.
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It's a completely different game. Thank you all for joining us on this deep
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dive into the DBS FY 2025 results.
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We hope this gave you some real clarity on what those numbers actually mean
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for your portfolio. Thanks for listening.
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Keep asking the hard questions. This content is intended to serve strictly and
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only as an informational, independent, objective summary of recent events.
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And should in no way be interpreted, construed, or relied upon by any party
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as inside information or financial advice.