Strong Performance at DBS, Singapore Bank stocks in focus

July 30: Bank stocks in focus next week

WRITTEN BY GOOLA WARDEN
SATURDAY, 31 JULY 2010 11:21

DBS GROUP HOLDINGSS has been hit by another impairment charge related to its controversial purchase of Hong Kong’s Dao Heng Bank nine years ago. Singapore’s largest bank said today that it made a goodwill impairment charge of $1.02 billion in 2Q10, resulting in a net loss of $300 million for the quarter.

DBS bought Dao Heng in 2001 for more than $10 billion, or three times book value. Under accounting rules at the time, the goodwill of $6.8 billion was to have been amortised over 20 years. The rules changed in 2005, however, and DBS is now required to carry Dao Heng in its books at “fair value”. DBS made an impairment charge of $1.13 billion related to Dao Heng in 4Q05. Dao Heng, which has since been renamed DBS Hong Kong, was carried in the group’s books at $8.43 billion as at June 30. That values Dao Heng at 2.2 times book value. By comparison, shares in Bank of China are trading at about 2.1 times book value, while Hang Seng Bank is trading at about 3.5 times book value.

On the operational front, however, DBS turned in a solid performance in 2Q10. Its loan book expanded 8.9% q-o-q, and 18.1% y-o-y. That drove DBS’ market share of Singapore dollar loans up by almost one percentage point, from 21.5% to 22.4%. Excluding the goodwill impairment charge, DBS chalked up earnings of $718 million. That was a record for the banking group, and some 20% higher than the most bullish analyst estimates. “It was above our expectations and consensus, led by another strong trading quarter,” notes Kenneth Ng, an analyst at CIMB Securities.

Piyush Gupta, CEO of DBS, warns that the group’s operational performance in 2H10 might not be as strong. “We don’t expect double digit [loan growth] for the second half,” he says. Also, net interest margins have been under pressure, declining by nine basis points in 2Q10 to 1.84%. Gupta says that “NIMs could see two to three basis points compression” in the second half.

Looking ahead, Gupta says DBS is trying to rebalance its footprint across the region, aiming for 40% of its earnings to come from Singapore; 30% from Hong Kong and China; and the remaining 30% from South and Southeast Asia. Currently, Singapore contributes 62%, Hong Kong 22%, India 8%-9%, China 2%-3% and the balance spread across other markets.

WATCHING THE BANKS
In the wake of the strong performance at DBS, bank stocks could be in focus in the coming week. “We wonder if UOB and OCBC could surprise with stronger-than-expected trading figures,” Ng says. “Our 2Q10 forecasts for UOB and OCBC stand at $582 million and $607 million respectively.” Oversea-Chinese Banking Corp will be reporting 2Q10 results on Monday, while United Overseas Bank is scheduled to report the week after on Aug 10. CIMB currently has “outperform” ratings for both OCBC and UOB with target prices of $10.79 and $23.32 respectively.

As for DBS, some analysts are turning more positive now. For one thing, it has a decent dividend yield. For 2Q10, the bank declared a dividend of 14 cents per share, bringing its total dividend for 1H10 to 28 cents. That translates to an annualised yield of 3.9% at the last done price of $14.40. Investors who opt for scrip dividend will receive their shares at a 5% discount. Shares in DBS are trading at 1.3 times its book value of $10.88 per share.

Jonathan Koh, an analyst at UOB Kay Hian, says that loan growth at DBS has been strong and broad based. He currently has a “buy” recommendation on the stock. Ng of CIMB, however, still has an “underweight” rating on the counter. Meanwhile, DMG & Partners says that DBS’ 2Q10 results were way above expectations, and that it is reviewing its “neutral” rating.

CHART VIEW
The STI (2,987) fell nine points on Friday, after testing an intra-day high of 3,018. As a result a dark cloud cover formed on the candlestick chart suggesting that the index is likely to continue lower in the coming week. While major support is at 2,900, the near term retreat should find support at 2,957. The trend remains upwards but resistance at 3,000 is formidable.

http://www.theedgesingapore.com/blog-heads/goola-warden/18534-weekends-comment-july-30-bank-stocks-in-focus-next-week.html

DBS bad debt spikes

DBS bad debt spikes

by Kelvin Chow
05:55 AM Aug 08, 2009

DESPITE enjoying record revenue of $1.79 billion in the three months ended June, DBS Group Holdings' performance was marred by a sharp increase in bad debts and provisions, giving cause for concern among several analysts.

On Friday, South-east Asia's largest lender said it made $466 million of allowances for doubtful debts in the second quarter, up a whopping eight times from $56 million a year ago.

This came as its non-performing loans (NPL) ratio, a measurement of loans close to or in default, surged to 2.8 per cent from 1.4 per cent. As a result, second quarter net profit fell 15 per cent on-year to $552 million.

To Fox-Pitt Kelton banking analyst Brian Hunsaker, the results show DBS is "still struggling a little bit with asset quality. It would suggest that they've still got some volatility to cope with before things will look better", he told Today.

Some investors sold off DBS shares after the results were released. The stock closed at $12.84, down 3.5 per cent - outpacing the Straits Times Index's decline of 2 per cent.

Among the three domestic banks, DBS recorded the biggest increase in NPL in the second quarter, UBS Investment Research banking analyst Jaj Singh said in a report on Friday, "surprised" by the spike in provisions.

DBS explained during a briefing that the NPL increase came primarily from "exceptional" exposures to shipping and Middle East corporates and institutions.

When asked if DBS had seen the peak in its NPL ratio, chief financial officer Chng Sok Hui replied: "I think there are signs that the credit pressure has already eased."

The NPL ratios of DBS' core markets, which are Singapore and Hong Kong, are also improving, she added.

Still, Ms Daphne Roth, head of Asian equity research at ABN Amro Private Bank, told Bloomberg: "Non-performing loans are still something that we're watching very closely because even though we seem to be past the worst, unemployment could still pick up."

DBS chairman Koh Boon Hwee, too, believed that for Asia, "the worst is over" - echoing views expressed earlier this week by his peers at United Overseas Bank and OCBC.

The second quarter's broad-based revenue growth - which surpassed the previous record high of $1.6 billion recorded in the first quarter - encouraged Mr Koh.

Net interest income - comprising interest earned on loans and interbank credit spreads - grew 5 per cent from a year ago to $1.11 billion.

Non-interest, which are fees earned from investments and brokerage activities, rose by about 25 per cent to $680 million.

However, Mr Koh said he remained "cautious about the continuing pace of improvement" in the economy.

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DBS results better than expected

Profits up 21% from Q1, but bad debts up $410m from Q2 2008

11:55 AM Aug 07, 2009

DBS Group Holdings, South-east Asia's biggest bank, reported a smaller-than-estimated 15-per-cent decline in second-quarter profit as income from stock broking, investment banking and wealth management rose.

Net income fell to $552 million from $652 million a year earlier, the bank said in a statement to the Singapore stock exchange this morning. The median estimate in a Bloomberg survey of analysts was for a profit of $425 million.

The net earnings represented an increase of 21 per cent from the previous quarter.

"DBS is well positioned to weather the uncertainties ahead as our balance sheet remains strong," chairman Koh Boon Hwee said in a statement.

Revenues rose 8 per cent from the previous quarter to a new high of $1.79 billion as better net interest margins, capital market activities, trading and investment income resulted in broad-based revenue growth.

Net interest income grew 3 per cent from the previous quarter and 5 per cent from a year ago to $1.11 billion.

Following several quarters of growth, loan volume was unchanged for the quarter. Including currency translation effects, loans fell 2 per cent from the previous quarter to $128 billion but remained 8 per cent above a year ago, said the bank.

Bad debt charges jumped almost nine-fold to $466 million, from $56 million a year ago.

Singapore and Hong Kong savings and current deposit volume grew during the quarter. Including currency translation effects, deposits were stable at $179.0 billion, said DBS.

Non-interest income rose 16 per cent from the previous quarter to $680 million, which was up 25.7 per cent on the $541-million figure of a year ago.

Trading income hit $172 million on the back of gains in foreign exchange and interest rate activities and better asset valuations, said DBS. Investment gains of $138 million, mainly from the sale of equity holdings this quarter, was up from the $106 million of the previous quarter.

DBS and smaller rival Oversea-Chinese Banking Corp were upgraded on July 23 to "buy" from "neutral" at Bank of America's Merrill Lynch on optimism earnings will improve as Singapore's economy recovers. The bank, which gets about a quarter of its earnings from Hong Kong, is also expanding in mainland China and Taiwan.

"DBS' earnings are most sensitive to an economic recovery," Merrill Lynch analysts Kar Weng Loo and Alistair Scarff wrote in their report, citing its low loan-deposit ratio and strong capital position. AGENCIES