Balancing ESG Risks and Opportunities

• As ASEAN’s largest bank, DBS (SGX:D05) is exposed to multiple ESG risks. These include contagion risks from clients due to the nature of its business of lending & investments as well as internal governance risks.
• In our view, DBS’ ESG risks are not un-typical for a regional bank of its size. We also note DBS has been leading regionally in establishing frameworks and policies to mitigate these risks. It is also been materially expanding its asset allocation towards sustainability-linked transactions. At the same time the group’s strong capital levels, deep balance sheet liquidity, should present market share opportunities in the medium term.
• Maintain BUY.

Mitigating Governance Risks

• DBS’ large regional footprint (54% of loans outside SG) exposes it to significant governance risks especially for fair dealing across product categories including wealth management and insurance. Money laundering is a material day to day operational risk. Data privacy and cyber security issues are significant given the sizable scale of DBS’ platforms.
• The group has had no material controversies under these risk categories in the past few years. It has put in place detailed and transparent policies for mitigating risks benchmarked to best practice standards, in our view.
• More details are available in the ESG Tear Sheet in page 2 of PDF report attached (Click 'view full report' button below).

Expanding Environmental, Social Footprint

• DBS has committed to not funding new coal mining & energy related segments, while nearly 40% of incremental loan funding in 2019 was towards sustainability-linked segments. DBS has also raised green bond funding to provide ring-fenced investments to sustainable segments. It has also started incorporating ESG scoring on its wealth management products.

Strong Balance Sheet

• DBS’ progressive dividend policy offers medium term dividend certainty. Strong CET1 ratio of 13.9% along with a liquid balance sheet (USD LD ratio 77%) provides significant opportunities for regional market share growth as corporates look to bulk up liquidity and diversify funding risks, especially as supply chains shift out of China to ASEAN.
• Maintain BUY.

Source: Maybank Kim Eng Research - 23 Jun 2020