In July this year, DBS Group Holdings Ltd’s (SGX: D05) chief executive Piyush Gupta was interviewed at the Invest Fair 2016 event. During his interview, Gupta shared the three main concerns he thinks investors have over banks in Singapore: (1) The quality of the banks’ loan portfolios; (2) uncertainty with the regulatory environment; and (3) the negative interest rate environment. It’s been over four months since Gupta’s appearance at Invest Fair 2016 and DBS has also released its 2016 third-quarter results back in November. I think it’d be interesting and useful for investors if I were to see how…
During his interview, Gupta shared the three main concerns he thinks investors have over banks in Singapore: (1) The quality of the banks’ loan portfolios; (2) uncertainty with the regulatory environment; and (3) the negative interest rate environment.
It’s been over four months since Gupta’s appearance at Invest Fair 2016 and DBS has also released its 2016 third-quarter results back in November. I think it’d be interesting and useful for investors if I were to see how DBS has fared in addressing the three concerns Gupta shared.
As I l already mentioned, the first concern Gupta brought up was the quality of the bank’s loan portfolio. In the third-quarter of 2016, DBS had to more than double its allowances for credit and other losses from S$178 million a year ago to $436 million. The move was made primarily due to the bank’s exposure to troubled companies within the oil and gas industry.
But, higher income (revenue for a bank) managed to offset this impact – DBS’s net profit for the third-quarter was S$1.071 billion, slightly higher than the S$1.066 billion seen a year ago.
The second concern was over regulatory uncertainty, in particular, the possibility of regulators requiring banks to set aside more capital to cover potential bad debts. Such a move can hamper a bank’s ability to generate profits.
From July till now, there has been no public indication from the Monetary Authority of Singapore (MAS), Singapore’s banking regulator, that it would require banks to increase their capital buffer for the emergence of more bad debt.
That said, DBS was fined S$1 million by MAS in October over a compliance lapse by the bank over its handling of 1MDB-related transactions. For perspective on the size of the fine, do note that DBS had earned over S$1 billion in profit in just the third-quarter of this year, as I mentioned earlier.
The third worry Gupta thinks investors have with banks is the negative interest rate environment seen in some countries. The fear was that the negative interest rates elsewhere in the world would place pressure on Singapore’s own interest rates, which are already low.
Thing is, interest rates have actually started trending up since Donald Trump’s presidential election victory. For example, a Singapore government 10-year bond with the code (NX16100F) has seen its yield increase from 1.93% at the start of November to 2.45% last Friday.
And in any case, DBS has managed to show strong growth in non-interest income in the third-quarter of 2016. (It is the interest income portion of DBS’s business that is affected by interest rates.) The bank’s total non-interest income during the quarter had increased by 24% year-on-year to S$1.11 billion. Meanwhile, its net interest income had remained essentially flat at S$1.815 billion.
On 31 October 2016, DBS also announced the acquisition of the wealth management and retail businesses of Australian bank ANZ in a number of Asian territories for a total of S$110 million above the respective businesses’ book values. These businesses will come under DBS’s non-interest income segment.
A Foolish conclusion
In all, it would appear that DBS has made some positive strides – with some aid from the general market environment, which it must be noted, the bank has no real control over – in addressing the three concerns that Gupta thinks investors have with banks in Singapore.
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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.