Will homecourt advantage still work for DBS?

DBS Group Holdings, Southeast Asia's biggest bank, said it will shift its priority on its Singapore home market after spending more than $5.4 billion in the past seven years expanding in Asian markets such as Hong Kong.

DBS also plans to rekindle the POSB brand it bought almost a decade ago, after reporting a 16 percent gain in second-quarter profit as trading income recovered and as it sidestepped additional losses on collateralized debt obligations.

“We've disappointed Singaporeans over the years and we aim to turn that around,” Richard Stanley, DBS's chief executive officer, said at a briefing. It is “our home market, we can do even better here.”

The focus on Singapore is the first major initiative by the 48-year-old former Citigroup executive since taking the helm in May. DBS is also turning to its home market after record lending in the city boosted net interest income. In Hong Kong, its biggest overseas market, net interest income dropped 23 percent.

The group's net income rose to S$652 million ($471 million) in the three months ended June 30, from S$560 million a year earlier, including one-time items, DBS said in a statement to Singapore's stock exchange. Profit beat the median S$600 million estimate of nine analysts surveyed by Bloomberg News.

The bank avoided having to further write down credit-market investments even as Merrill Lynch said last month it agreed to sell $30.6 billion of CDOs for $6.7 billion.


'Comforting' Quarter
The absence of more provisions “is comforting for this quarter,” said David Lum, an analyst at Daiwa Institute of Research in Singapore. DBS “beat a lot of estimates as the market was expecting a lot of negative scenarios for impairments and writedowns. But I don't know if the market is convinced that the worst is over.”

DBS posted a 13 percent drop in the amount of provisions it made for bad loans, to S$56 million. Total provisions for investments including collateralized debt obligations stood at S$282 million as of June 30, unchanged from three months earlier.

“These are very difficult times in our industry,” Stanley said. “We have a way to go before we see the end of it.”

The value of the investment portfolio was little changed at S$1.11 billion from the previous three months, and the worth of securities in DBS's trading book rose 13 percent to S$341 million because of “improvements in some of their component values,” the bank said.


'Biggest Positives'
In the first quarter, DBS booked S$86 million of losses for assets of Red Orchid Secured Assets, a structured investment vehicle.

The lack of major CDO writedowns is “one of the biggest positives,” JPMorgan Chase analyst Harsh Wardhan Modi said in a report. “This underscores our view that current provisioning adequately reflects underlying market values,” he said, keeping his “overweight” call on the stock and price target of S$25.

Deteriorating asset quality and rising non-performing loans may not trouble DBS, as it has the lowest non-performing loan ratio among the three Singapore banks, Kenneth Ng, an analyst at CIMB-GK Securities, said before the announcement.

“Certainly, that's a worry, but we haven't heard of people losing jobs in big numbers or property being foreclosed,” he said.

DBS expects loan growth to slow for the full year to “low double-digits” in percentage terms, said Stanley, who was the managing director of Citigroup's China operations.


Slowing Loan Growth
“It's a possibility that loan growth will slow,” he said. “There's a more challenging environment ahead.”

Trading in foreign exchange and interest rates picked up during the quarter, helping reverse the previous quarter's loss, DBS said. The one-off item was a S$16 million impairment charge for its investment in Thailand's TMB Bank.

DBS shares rose 0.3 percent to S$18.80 at the close, reversing an earlier decline of as much as 1.8 percent in Singapore trading before the midday break announcement. The stock has fallen 9.2 percent this year, the worst performer among the city-state's three banks.

United Overseas Bank, Singapore's second-biggest, said Aug. 5 second-quarter profit rose 2.7 percent to S$601 million on expanding loans, while Oversea-Chinese Banking said profit fell 20 percent to S$425 million. Both banks also said loan growth may slow for the rest of the year.

Net interest income, or interest revenue from borrowers minus returns paid to depositors, climbed three percent to S$1.06 billion from S$1.03 billion a year earlier, DBS said. Loans rose 18 percent from a year earlier to S$118.6 billion.

The net interest margin fell to 2.04 percent in the quarter from 2.09 percent in the previous three months, and narrowed from 2.21 percent a year earlier.

“DBS's growth rate in terms of lending slowed down and their margins came down; it's not a negative set of results but the outlook is not that bullish,” Daiwa's Lum said.
The bank's fee income dropped eight percent to S$342 million from S$371 million, while net trading income rose 14 percent to S$111 million.


How has DBS expansion in the Asian market fared as compared to its rivals?