DBS Bank seen to defy analysts' year-end predictions

With record net profit of S$1.97b for 9M10 and revenue growth of 14.7% y-y, the bank’s full year earnings for FY10 is likely to exceed the S$6.9b forecast by about S$300m.

In a statement, Phillip Securities Research said that despite the bank’s fee income falling 5.8% y-y and loan-related revenue dropping by S$21 million to S$80 million, the bank raked in profit from some fixed income instruments, which were further boosted by the conducive market environment. “Despite better trading environment compared to 2Q10, DBS reported a 12% decline in net trading income of S$235 million but this was offset by a 26% gain from net income on financial investments.

Cost to income ratio held steady at 40% but management guided that the rate to rise to 45% over the next few quarters,” the research firm said.

Net interest income improved marginally but NIM continued the downward trend falling to 1.8%. Yields for new housing loans were lower than those that had run off. In addition, deposit costs were higher in Hong Kong. The impact of the margin decline was offset by higher customer loan volumes.

Net income grew by just 1% despite growing by 35% last quarter. It remains to be seen if net income of above $700 million is sustainable for the bank given a challenging outlook ahead.

Customer deposits grew slightly by 0.7%, from $183.9 billion to $185.2 billion in 3Q10. Net loans grew at a stronger pace, by 1.17% from $146.1 billion to $147.7 billion. LDR increased to 79.8%.

Gross customer loans increased by 0.93% to S$150,534 million. Excluding currency effects, loan growth was 4%. Loans by industries, Manufacturing, Financial Institutions and Others industry registered lower loan value.

By geographical segments, loan value fell in Hong Kong, rest of Greater China and rest of the world. By business segment, Institutional Banking unit reported lower customer loans value.

“Overall, despite the relatively flat contributions from revenue segments on a q-q basis, there is greater clarity on DBS growth strategies as the bank materializes its targets. However, there are challenges ahead for the banking sector and we believe net interest income is likely to remain flat; fee income shows slight growth; whereas other non-interest income segment may provide upside surprises. Given our view of the banking sector, positive deviation from this model will thus add marks for the banks,” Phillip Securities said.