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DBS Group Holdings Ltd’s Latest Earnings: Higher Allowances Take a Bite Out of 2016’s Profit

DBS Group Holdings Ltd (SGX: D05) reported its 2016 fourth quarter and full year earnings this morning.

DBS Group is one of the three major banks based out of Singapore and is the largest bank in the country by asset size. DBS Group is a leading financial services group in Asia, with 280 branches across 18 markets.

You can catch up with the results from the bank’s third quarter earnings here.

Financial highlights

The following’s a quick rundown on DBS Group’s total income (essentially the “revenue” for a bank):

  1. For the fourth quarter of 2016, DBS Group’s net interest income fell by 2% year-on-year to $1.82 billion. For the full year, net interest income was $7.31 billion, up 3% from the year before.
  2. Net fee and commission income for the reporting quarter increased by 6% year-on-year to $515 million. For 2016, net fee and commission income was up 9% to $2.33 billion.
  3. Other non-interest income jumped 40% year-on-year to $437 million. The segment recorded $1.85 billion in 2016, up 19% from 2015.

Taken together, the three income streams brought DBS Group $2.78 billion in total income for the reporting quarter, or 5% above the fourth quarter of the prior year. For the full year, DBS Group recorded total income of $11.49 billion, up 6% from 2015.

On the expense side of things:

  1. DBS Group’s expenses was down 2% year-on-year to $1.22 billion for the fourth quarter. For 2016, expenses was 1% higher, ending at $4.9 billion.
  2. Allowances for credit and other losses ballooned by 87% to $462 million in the fourth quarter. For the full year, allowances was up a staggering 93% to $1.43 billion.

In summation, DBS Group’s net profit for the fourth quarter was $913 million, some 9% lower compared to a year ago. The selfsame figure for 2016 was $4.2 billion, or 2% lower compared to 2015 (excluding a one-time item in 2015).

DBS Group ended the reporting quarter with a net book value per share of $16.87, up 6.6% from the selfsame figure of $15.82 seen a year before.

The board of directors also proposed a final dividend of $0.30 per share, which brings the total dividend for the full year to $0.60 per share. This is unchanged from the dividend paid out in 2015.

Operational highlights

DBS Group’s net interest income fell in the reporting quarter due to lower net interest margin. The net interest margin was 1.71%, down from the net interest margin of 1.84% recorded a year ago. For the whole of 2016, DBS Group’s net interest margin came in at 1.80%, up from 2015’s 1.77%.

Meanwhile, net fee income increased in the quarter from higher wealth management and card fees. Elsewhere, other non-interest income rose from higher trading income and wealth management treasury customer sales.

Customer loans for the reporting quarter grew by 6% from a year ago to reach $301.5 billion. The non-performing loan (NPL) ratio ballooned to 1.4%, up from the 0.9% recorded in 2015’s fourth-quarter.

DBS Group also ended 2016 with customer deposits of $347.4 billion, or 9% higher from the same quarter a year before. The loan to deposit ratio was 86.8%, down from end-2015’s 88.5%.

Based on regulatory requirements from the Monetary Authority of Singapore, banks in Singapore must have the following Capital Adequacy Ratios (CARs): Common Equity Tier 1 (CET1) CAR of at least 6.5%; Tier 1 CAR of at least 8%; and Total CAR of at least 10%.

DBS Group can be considered to be a well capitalized bank as its CARs are comfortably higher than MAS’s requirements: The bank ended 2016 with a CET1 CAR, Tier 1 CAR, and Total CAR of 14.1%, 14.7%, and 16.2% respectively.

The bank’s chief executive officer, Piyush Gupta, summarized DBS’s reporting quarter and year with a few words:

“We achieved a 10% increase in full-year profit before allowances despite a challenging operating environment. The strong operating performance is the payoff from investments we made to build multiple business engines and to digitalise the bank. They enabled us to meet headwinds related to China and stresses in the oil and gas support services sector.

The financial discipline we exercised over the years in building up buffers for capital, liquidity and allowance reserves has ensured that our balance sheet remains resilient. Our financial strength will stand us in good stead in the coming year as we continue supporting customers and delivering shareholder returns.”

Looking ahead, DBS Group expects to achieve mid-single digit growth in loans and income in 2017. The bank also expects to achieve a net interest margin that’s similar to what it did in 2016.

At its opening share price of $18.31 today, DBS Group trades at around 1.09 times book value and has a trailing dividend yield of 3.3%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.