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DBS Group Holdings Ltd’s Quarterly Profit up 20% but CEO Warns of Spillover Effects from Trade Conflict

Singapore banks have been in the spotlight recently as investors wonder what sort of impact the US-China trade conflict and the property cooling measures will have on them. On Thursday last week, DBS Group Holdings Ltd (SGX:D05) was the first major Singapore bank to release its earnings update for the second quarter of the year. Here are the key takeaways from its earnings report and media presentation.

Operating net profit up 20% year-on-year

Total income for the quarter rose 10% year-on-year to S$3,203 million. Profit before allowance climbed 8% to S$1,785 million while operating net profit soared 20% to S$1,372 million. Below are some of the key figures for the quarter:

Source: Author’s compilation; DBS FY2018 Q2 Earnings

As you can see, there was an 18% growth in net interest income, driven by loan growth and higher net interest margin (elaborated below). Net fee and commissions income grew 11%. There was an acceleration of growth in consumer banking, wealth banking and institutional banking, but treasury market income declined during the quarter.

The return on equity stood at a healthy 12.5%.

Higher interest margin driving growth

As anticipated, the net interest margin for the quarter rose to 1.85%, 11 basis points higher than the same period last year. It also represents a 2 basis points increase from the first quarter of 2018.

With more rate hikes expected later this year and in 2019, net interest margins are expected to continue expanding.

Overall loans were up S$5 billion or 1% from the first quarter to S$343 billion. This was driven by higher non-trade corporate loans and consumer loans, which were up S$5 billion or 2%.

Liquidity and balance sheet ratios

As of the end of the latest quarter, DBS had ample liquidity with a liquidity coverage ratio of 135%. Banks are required to have more than 100% liquidity coverage, indicating they have the means to meet short-term liquidity needs. At 135%, DBS is well-covered in this regard. It maintained a loan-to-deposit ratio of 87%. Non performing loan ratio stood at 1.6%.

Another commonly used capital measure is the Common Equity Tier 1 ratio. All banks must have a CET1 capital adequacy ratio of above 6.5%. DBS has a CET-1 ratio of 13.6% and a comfortable leverage ratio of 7.0%.

All of these point to a well-managed bank and it should be able to withstand any unforeseen economic stresses.

Fee income up 12% year-on-year

A strong performance by the wealth management segment drove fee income up 12% year-on-year. Over the first half of 2018, fee income rose S$196 million or 13.3% to S$1,668 million.

But on a quarterly basis, fee income declined by S$34 million or 3.9% to S$817 million. On a half-year basis, consumer banking and wealth management income rose 20% year-on-year to a new record. Wealth management, in particular, did very well over the 6-month period, rising 30% to S$1.33 billion.

It is heartening to see DBS expand its fee income business as it is a high margin, low capital business that can drive profitability.

Dividend for the first half of 2018

DBS declared a 60 cent dividend for the first half of the year. This is in line with its guidance. Below is a chart showing DBS’ dividend payout over the last few years:

Source: DBS FY2018 Q2 CFO Presentation

Outlook and CEO musings

CEO Piyush Gupta said that while the impact of the first phase of tariffs in the US-China trade tensions have had little impact, the impact of phase two is still “uncertain”. A 25% tariff on US$200 billion worth of Chinese imports can have a material impact on businesses and hurt investor confidence.

In addition, Gupta said that he expects property loan growth to be affected by the property cooling measures. DBS has a local housing loan market share of 31%.

On the positive side, he said that a strong US economy will continue to provide tailwinds for the bank.

All things considered, Gupta expects loan volume to grow at 6-7% instead of the 8% previously forecast. Net interest margins are expected to be between 1.86% and 1.87%, up from 1.85% guided earlier. Income for the year is expected to be maintained at low double-digit growth rate.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on DBS Group Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.