DBS earnings impaired by wrong bets on Fed tapering

Profits would've beaten forecast, says analyst.

According to CIMB, post-briefing, its view of DBS’s 3Q is that it was mostly impaired by bets that anticipated a US Fed tapering move. Excess US$ liquidity was built up and treasury hedges were placed to protect against a hike in rates, only to be wrong-footed by the Fed’s “we didn’t say taper”.

Here's more from CIMB:

3Q13’s net profit (S$862m) was already ahead of consensus (S$839m) even with bets on Fed tapering going wrong. 3Q’s profit would have beaten our S$880m forecast if those bets were backed out.

Our Gordon Growth-based target price (1.39xCY13 P/BV) and Outperform rating are unchanged. Catalysts include a revival of bond market activity and a reversal of weak treasury gains in 4Q.

What Happened
In his post-results briefing, DBS’s CEO said the bank made the wrongbets on Fed tapering. There were two areas of impact:

1) Anticipating a dollar squeeze, DBS built up its US$ liquidity buffers; the excess dollar liquidity position costs DBS ~4bp in margins when the Fed did not taper, and excess liquidity had to be placed on the interbank.

2) Weak treasury performance was purely trading-led and solely in September. 3Q’s treasury customer flows eased qoq but generally held up over the quarter.

Treasury did poorly only because DBS reduced positions and added hedges for rising rates in September, only to be wrong-footed by the US Fed’s decision to renege on tapering.

What We Think
We quantify the amount of ‘lost’ profits because of its tapering bets and estimate that 3Q net profit would have been closer to ~S$933m if the NII impact and treasury losses were backed out.

This is within the net profit range attained between 1Q (S$950m) and 2Q (S$887m), and also well above consensus estimate of S$839m for 3Q.

We are relieved with updates across various business lines that showed most of the core revenue as being relatively flat sequentially.

As the impact of wrong Fed tapering bets struck in 3Q, we are cognisant that 3Q profit was somewhat padded up also as DBS reduced GP to 10bp of loans vs. 20bp in prior quarters.

That said, this does not add any discomfort as we believe it was done to bring reported profit up closer to ‘normalised’ profit levels.