How Did DBS Group Holdings Ltd Earn More Interest From Shrinking Assets?

In a previous article of mine, I noted that DBS Group Holdings Ltd (SGX: D05) generated 63% of its $4.87 billion in total revenue in the first-half of 2016 from net interest income.

Net interest income essentially comes from the difference between the interest that DBS receives from the money it has lent out (for mortgage loans, for instance) and the interest the bank pays from the money it has borrowed (from depositors, for instance).

An interesting situation

DBS faced a very interesting situation in the first-half of 2016 – it earned higher net interest income despite a shrinking interest bearing asset base.

In the first-half of 2016, DBS’s net interest income came in at S$3.666 billion, up 6.8% from the first-half of 2015. As for the assets, DBS recorded an average S$396.8 billion in total interest bearing assets in the first six months of 2016, down from the S$403.1 billion seen in the first-half of 2015.

An increase in the net interest margin for DBS from 1.72% in the first-half of 2015 to 1.86% had helped the bank earn higher net interest income. But, how did the bank manage this?

How growth was achieved

Let’s take a granular look at the changes in DBS’s interest-bearing assets over the past year. The bank classifies its interest-bearing assets into four categories, namely, Customer non-trade loans, trade assets, interbank assets, and securities.

The following table shows the four categories’ average balance in the first-half of 2016, the actual interest earned, and the average interest rate DBS had earned on them for that period. It also shows the year-on-year changes for each number.

Source: DBS earnings release

We can see that customer non-trade loans earned the highest amount of interest for DBS and it was the main driver for DBS’s higher net interest income.

DBS had experienced both lower rates and lower loan volume for trade assets. This coincided with IE Singapore’s assessment that total trade volume growth in Singapore had been in the negative zone for the first six months of the year.

Other banks also borrowed less money from DBS in the interbank market and the interest rates and average balance for interbank assets had declined.

Securities was the only other bright spot of growth as its average balance grew and it earned more interest. But, the category saw its average interest rate decline from 2.36% to 2.29%.

A Foolish conclusion

DBS had made up for reduced assets in trade assets and interbank assets with growth in customer non-trade loans and securities.

Now, growth in interest income from interest-bearing assets would not be useful if DBS’s interest-bearing liabilities had racked up higher interest expenses for the bank. Turns out, DBS’s interest expenses had been reduced from S$1.34 billion in the first-half of 2015 to S$1.20 billion in the first-half of 2016.

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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 Ong Kai Kiat owns shares in DBS Group Holdings.