DBS 20% gain in 2Q profit disappoints

It benefitted from rising interest rates in S’pore and HK, and fee income from its expanding wealth management ops

By BLOOMBERG

SINGAPORE • DBS Group Holdings Ltd shares fell after second-quarter (2Q) results suffered from what CEO Piyush Gupta described as the worst performance in its treasury and markets operation since he took the top job almost a decade ago.

While net income rose 20% to S$1.37 billion (RM4.1 billion) in the three months ended June, that missed analysts’ expectations for S$1.44 billion.

Shares in South-East Asia’s largest lender slid as much as 3%, the biggest intraday decline since July 6.

Volatility in Asian bond markets as result of US-China trade tensions together with a flattening yield curve caused losses in the bank’s credit trading portfolio, Gupta said at a post-earnings press conference.

That combined with the selloff in Asian equity markets during the quarter to create “a perfect storm in some ways”, Gupta said.

DBS, the first of the three large Singapore banks to report 2Q results, said it benefitted from rising interest rates in Singapore and Hong Kong, and fee income from its expanding wealth management operations. But that was overshadowed by the effect of market volatility on the treasury and markets division, which reported a S$50 million pretax loss for the quarter.

“This has actually been the worst quarter from Treasury Markets since I’ve been with DBS,” Gupta said.

Spreads on Asia’s dollar bonds widened by 60.7 basis points during the 2Q, the biggest quarterly spike since 2013, according to a Bloomberg Barclays index, as China defaults hurt investor sentiment and the US Federal Reserve’s tightening cycle pressured credit markets globally.

“While trading income was expected to decline, it came down by much more than expectation,” Marcus Chua, an analyst at Nomura Singapore Ltd, said yesterday in a report. “As long as market sentiments remain weak, we should continue to see trading income pressure for the second half of 2018.”

Gupta said he expects the growth of exchange-traded funds and high-frequency trading to depress the bank’s income from treasury and markets over the longer term.

The division is likely to generate around S$250 million per quarter, down from between S$250 million and S$300 million in the past, Gupta said.

Earnings Highlights
Net interest margin (NIM) gained 11 basis points from a year earlier to 1.85%. Loans expanded 12% to S$338.1 billion. Wealth management fees increased 22% to S$300 million.

Return on equity at 11.8% from 10.1% a year ago. Non-performing loan ratio rose to 1.6% from 1.5%. Net trading income down 23% at S$227 million.

Net income from investment securities slumped 68% to S$30 million. Cost-to-income ratio increased to 44.3%. First half dividend of 60 Singapore cents, up from 33 cents a year ago.

Gupta, who became CEO in November 2009, also caut ioned about heightened macroeconomic uncertainty resulting from rising USChina trade tensions. Loan growth this year is now forecast at between 6% and 7%, down from the earlier 8% projection, “due mostly to trade loans”, the bank said.

DBS’ NIM for the year is likely to be one to two basis points above the previous guidance of 1.85%, as a result of higher US rates, Gupta said.

Another bright spot is the bank’s wealth management operation, where assets under management rose 4% from the previous quarter.

“Overall results were decent, although not everything was shiny,” said Kevin Kwek, an analyst at Sanford C Bernstein in Singapore. “On the positive side, on-year loan growth was strong at 12%, allaying fears around the impact of trade wars and Singapore property measures, with business momentum that the bank described as strong, including in wealth management.”

DBS traded 2.2% lower at S$26.34 at 2:21pm in Singapore yesterday, paring this year’s gain to 6%. That compares to a 3.5% decline in the benchmark Straits Times Index.