DBS Group Holdings Ltd (SGX: D05) recently released its results for the quarter ended 30 June 2019. All the headline numbers were positive, with DBS reporting a record-high profit for the first half of the year. Here’s what to expect in the second half of 2019 for Singapore’s largest bank.
Expected drop in net interest margin
The net interest margin is the difference between the interest earned on loans and the bank’s cost of capital. The higher the net interest margin, the more the bank earns from loans.
DBS benefited from its push toward loan pricing increases in the first half of 2019, resulting in net interest margins rising three basis points from the first three months of the year.
The chart below shows the net interest margin trends over the last six quarters.
Source: DBS Group Holdings Q2 2019 CFO Presentation
However, investors should note that the net interest margin is expected to fall in the second half of the year due to the US Federal Reserve cutting rates in its latest policy meeting.
DBS CEO, Piyush Gupta, however, said, “We’ve been prepared for this scenario and built up our securities book in the four- to five-year tenor. These measures will cushion some of the headwinds from the rate cuts.”
He said that the bank anticipates a drop in net interest margin in the third and fourth quarter as net interest margin rates have peaked. On a full-year basis, it expects to get a mid-single-digit net interest margin increase, as what they guided for earlier.
Maintain a mid-single-digit loan growth for full year
Loan volume in the first half of 2019 grew 2%. In the most recent quarter, overall loan volume was up S$4 billion, or 1% from the previous quarter.
Nevertheless, Mr. Gupta is optimistic that the bank can hit its guidance for mid-single-digit loan growth. The mortgage loan book was the main headwind in the first quarter of 2019 but did improve in the second quarter. Mr. Gupta said that he expects the bank to get S$1 billion to S$1.5 billion in mortgage loan growth for the rest of the year.
He also expects some “upside” in trade loans toward the end of the year and around S$4 billion to S$5 billion growth in non-trade corporate loans. Ultimately, all this should add up to around a mid-single-digit percentage increase in loan volume this year.
Recoveries on previously taken allowance to provide upside
Thirdly, DBS has been prudent in building up additional general allowances in light of ongoing macroeconomic uncertainties. The allowances are an estimate of credit risk and are also known as the reserve for bad debts.
Mr Gupta highlighted that DBS might be able to have some recoveries on previously taken allowances. If so, this could provide future uplift to earnings in 2020 and 2021. This could be a shining light for the bank amid the lower net interest margins and uncertain economic conditions over the next few years.
The Foolish bottom line
The headline numbers were certainly pretty. However, DBS may face some near-term challenges due to the anticipated narrowing of net interest margins and uncertain macroeconomic conditions.
Nevertheless, the bank has a solid track record of maintaining a profit even amid difficult conditions. It also has a robust balance sheet and may even see some uplift from recoveries of previous allowances.
All things considered, I remain very optimistic about DBS’s long-term prospects.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia owns shares of DBS Group Holdings Ltd. The Motley Fool Singapore has recommended shares of DBS Group Holdings Ltd.