DBS’ trading income volatility set to persist

Earnings came in right between ours and consensus expectations. DBS recorded 2Q11 net profit of S$735m, which is right between consensus expectation of S$750m and our S$720m forecast. Net interest income was ahead of our expectations, rising 6.9% QoQ to S$1.20b, primarily due to average interest-bearing assets rising 5.4% QoQ. On the other hand, there was sequential weakness in net trading income, which fell 43% QoQ to S$146m, due to marked-to-market impact of hedges taken for fixed income investments. ROE of 10.6% was lower than 1Q11’s 12.1%. We will be reviewing our earnings forecast and recommendation.

Asset expansion led to sequential net interest income growth. The strength of net interest income was due to asset expansion. Loans expanded 7.1% (S$11.3b) sequentially, driven by Singapore loans rising 7.2% and rest of Greater China (excluding HK) surging 34% sequentially. By industry, general commerce accounted for half the loan expansion, rising 34% (S$6b) sequentially. NIM was unchanged sequentially at 1.80%, in line with our expectations.

Trading income came in even lower than our relatively pessimistic forecast. We highlighted in our preview note the risk of lower 2Q11 trading income. The actual 2Q11 trading income of S$146m was down 43% sequentially and 11% lower than our expectations. We expect this volatility of trading income to persist in the quarters ahead.

Expenses rose 3.2% QoQ. Staff costs rose with a higher headcount, while non-staff costs also rose.

Asset quality continued to improve, with NPL ratio falling to 1.5%, versus Mar 11’s 1.8%. Correspondingly, allowances for credit of S$137m was close to 1Q11’s S$125m.