SINGAPORE (Apr 29): DBS Group Holding’s share price closed 99 cents or 3.61% higher on Monday, underpinned by strong earnings for its first quarter.
See: DBS 1Q earnings up 9% to record $1.65 bil on healthy business momentum, higher net interest margin
See also: DBS posts record profit on lending gains, raises bar for Singapore banks
Net profit for 1Q19 rose 9% y-o-y and 25% q-o-q to $1.65 billion, beating analysts’ expectations.
Net interest income rose 9% y-o-y to $2.31 billion, helped by higher interest rates from Singapore and Hong Kong.
Loans grew 1% q-o-q and 5% y-o-y to $364.06 billion., led by non-trade corporate loans.
Return on equity surged to 14%, the highest in more than 10 years.
Trading income rose 20% y-o-y to $443 million from gains in interest rate and credit activities.
Net gain on investment securities doubled to $53 million from a low year-ago base.
On a q-o-q basis, treasury and markets income trebled, to $293 million in 1Q19 compared to $92 million in 4Q18.
“Guidance given [to analysts] for the trading part of business is around $200 million per quarter, and this quarter the income was way over, at $293 million,” says Piyush Gupta, group CEO of DBS.
As equity market recovered and credit spreads fell, DBS “made a lot of money,” adds Gupta.
Higher equity markets raised the valuations of equity linked products while bonds were revalued higher when interest rates fall, he explains.
Treasury and markets income had been falling because the yield curve has been flattening, and the ability to make money from gapping is limited, Gupta says, but this showed up as trading income, boosting total earnings.
Excluding treasury and markets, net interest margins would have been 2.15% instead of the 1.88% reported in 1Q19.
New accounting standard boosts net profit
DBS has adopted SFRS (Singapore financial reporting standard) 9 which requires banks to hold reserves on the loan portfolio.
Under SFRS9, banks are required to report ECL (expected credit loss).
Under ECL, banks classify loans under stage 1, a strong portfolio, stage 2 which is the weaker portfolio and for which banks maintain collateral and stage 3, an even weaker portfolio.
The ECL system is based on the credit cycle and the macroeconomic outlook.
DBS has adopted an international ECL model to mimic what is happening in the credit cycle and marcoeconomic environment.
“For the $100 million writeback you should think of it intuitively, as half of it coming from actions that we took for Stage 2 assets. For [Stage 2] the more problematic part of our credits, we’ve managed out some of those [loans] and we took collateral, and the other half [of the writeback] is due to the better credit environment,” says Chng Sok Hui, CFO of DBS.
Another change in SFRS impacted NIM. SFRS 16 requires banks to capitalise lease liabilities (such as rentals).
For DBS, this amount is $1.9 billion for which the bank has to put up capital against it. In addition, DBS has to fund the $1.9 billion, and the bank has assumed funding cost of 2% which has an immediate impact on net interest income. Excluding this impact, NIM would have been higher.
While Gupta was upbeat about general business conditions and business momentum, he sounded a cautious note on DBS’s housing mortgage outlook.
Housing loans fell by around $570 million q-o-q and new bookings are half of year ago figures, Gupta reveals.
However, for the full year, Gupta expectings housing loans to rise by between $1 billion and $1.5 billion this year, based on the bank’s pipeline, including mortgage bookings for new launches.
Apart from the property market, the macro environment is benign. However, if the US Federal Reserve lowers interest rates this year instead of next, it would send a negative message to the markets, and, declining interest rates are generally not positive for banks.
