DBS Group Holdings Ltd’s Latest Earnings: Cashing in on a Record Quarter

DBS Group Holdings Ltd (SGX: D05) released its fiscal first-quarter earnings (for the three months ended 31 March 2015) this morning.

For some context later, here’s a quick introduction of DBS. As the largest bank in Singapore and Southeast Asia, DBS has a regional network of 250 branches that spans 17 countries.

DBS’s local peers include Oversea-Chinese Banking Corp Ltd (SGX: O39), the second-largest banking group in Singapore by total assets, and United Overseas Bank Ltd (SGX: U11), one of the biggest regional banks with a network of more than 500 offices in 19 countries.

 With that, let’s dig into DBS’s latest earnings release.

Financial highlights

For the first quarter of 2015, DBS’s total income (revenue for the bank) advanced 12% to S$2.74 billion from a year ago on the back of “broad-based growth across all business units.”

DBS’s total income can be split into two main buckets: Net interest income and non-interest income.

During the quarter, the bank saw its net interest income grow 14% year-on-year to S$1.69 billion, powered by an 11% increase in loans to S$281 billion. An increase of three basis points in net interest margin from 1.66% a year ago to 1.69% added icing to the cake.

Meanwhile, DBS’s non-interest income (consisting of net fee and commission income, and other non-interest income) also made considerable improvement by increasing 9% year over year to S$1.05 billion; this is the first time the bank’s non-interest income had crossed the S$1 billion mark.

Here’s a quick rundown on the different parts making up DBS’s non-interest income:

  • Higher unit trust and insurance sales coupled with increased fees from credit and debit card operations contributed to a 10% gain in net fee and commission income from S$510 million a year ago to S$560 million.
  • Other non-interest income managed to grow by 7% to S$486 million “as DBS was well positioned during a quarter marked by monetary easing by various central banks.”

Total expenses crawled up 13% year over year to S$1.18 billion in the quarter, underpinned by higher staff and computerization costs.

These – as well as a 20% jump to S$181 million in allowances for credit and other losses – had partly been the reason for DBS’s bottom-line growing slower than its top-line; DBS ended its fiscal first-quarter with a net profit of S$1.13 billion, up 10% from a year ago.

If one-time items (as shown below) are included for both the first quarters in 2015 and 2014, DBS’s net profit would only have grown by 3% year over year to S$1.27 billion. Here’s a description of the one-time items:

The bank recorded a one-time gain of S$136 million for the first quarter of 2015 from the disposal of a property investment in Hong Kong. This compares to the first quarter of 2014 when there was a net gain of $223 million for the sale of DBS’s stake in the Bank of the Philippine Islands, less a sum of $25 million donated to the National Gallery Singapore.

DBS ended the first quarter of 2015 with a diluted net book value of S$15.30 per share, up 14.7% from the selfsame figure of S$14.04 a year ago.

Business highlights

As mentioned earlier, DBS’s net interest margin for the quarter had increased from 1.66% a year ago to 1.69%.

The net interest margin is an important ratio for investors to track because it – as my colleague Ser Jing describes – “measures the spread between the interest a bank charges on the money it lends out, and the interest that a bank pays on the deposits it receives.” All things equal, a higher net interest margin would be preferred over a lower figure.

But that said, investors should still be aware that there can be a bad way for a bank to juice its net interest margin and that is to make risky loans (generally, banks charge higher interest for riskier loans).

It’s bad because these loans have a higher chance of default and can thus put a bank into trouble if they do default en masse. This brings me to another important operational metric for the bank: the Non-performing loans (NPL) ratio.

The NPL ratio measures the amount of non-performing loans there are in relation to a bank’s total loans. In other words, it gives investors a window to check on the quality of loans that a bank makes. On this front, investors might be happy to see that DBS’s NPL ratio has stepped down from 1.0% in the first quarter of 2014 to 0.9% for the reporting quarter.

Financial position

DBS ended the first quarter of 2015 with a “well-capitalised” balance sheet. The Monetary Authority of Singapore has set rules requiring banks in Singapore to at least meet the following Capital Adequacy Ratios (CARs): Common Equity Tier 1 at 5.5%, Tier 1 at 8.0%, and Total at 10.0%. With DBS, its latest Common Equity Tier 1 CAR, Tier 1 CAR, and Total CAR stands at 13.4%, 13.4%, and 15.3% respectively.

(The CARs are a measure of the amount of cushion that a bank has to absorb losses; the higher the CAR, the thicker the cushion.)

But, investors might also want to note DBS’s rising loan-to-deposit ratio (LDR). The bank ended March 2015 with a LDR of 86.5%; the figure was 84% a year ago. LDRs that are too steep can be a signal that a bank’s over-extending itself when it comes to making loans.

As of end-March 2015, DBS had total deposits of S$324 billion, up 7.6% from S$301 billion seen a year ago.

Some final comments

Piyush Gupta, Chief Executive of DBS, is upbeat about the bank’s strong performance during the quarter and commented:

“DBS started the year on a solid footing, with strong all round performance yet again. Despite a slowdown in trade volumes, the bank’s first-quarter earnings reached a record high. This is testament to the strength and resilience of the DBS franchise. We will continue to grow our business, while keeping a watchful eye on the economy.”

As of the time of writing (3:34 pm), DBS is trading at S$20.95. That translates into a price-to-book ratio of 1.4 (based on its latest book value of S$15.30 per share).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.