DBS seen to post S$700m net profit

But loan growth is expected to slow to 4% qoq.

According to CIMB, DBS had beaten expectations in recent quarters by cross-selling treasury products to generate client-driven treasury income.

Here’s more from CIMB:

DBS is due to release its 4Q11 results on 10 Feb. We forecast a S$700m net profit (-8% qoq) vs. consensus’s S$687m. We expect PPOP (-3% qoq) to be down marginally because of lower non-interest income. Singapore equity-market volumes were at one of their lowest in recent years, so capital-market- and trading income would have been muted for all Singapore banks. Corporate transactions likely slowed substantially as well.

DBS had beaten expectations in recent quarters by cross-selling treasury products to generate client-driven treasury income. As customer flows tapered off in 4Q, we think treasury-related revenues cannot be expected to stay high for DBS either. We will not be overly concerned as we think its non-interest-income consistency over six quarters makes one weak quarter less worrying.

We expect loan growth to slow to 4% qoq. More pertinent data points would be: 1) whether it sustained its rapid US$ loan growth; and 2) guidance on margins (have they bottomed out?). The biggest re-pricing opportunity today is among large corporates and as a corporate bank, DBS would be the clearest beneficiary.

The bank’s ability to re-price corporate loans comes about because the cost of borrowing in US$ has gone up tremendously for all banks. A year ago, DBS could borrow in Hong Kong at 10bp over LIBOR but in 4Q11, interbank quotes were as high as 150bp over LIBOR. Funding cost pressure in Hong Kong had already been the culprit behind DBS’s margin compression in earlier quarters.

A drastic spike in funding costs is still most likely to show up again in 4Q11, meaning DBS’s steep 3Q11 NIM compression (-7bp to 1.73%) could have worsened in 4Q11. This reflects the time lag between a swift re-pricing of funding costs and the lagged re-pricing of its loan book. Our ground checks suggest that corporate lending rates had been re-priced the most in 4Q11, while mortgage rates had also gone up by about 20bp.

Other concerns for DBS would be credit quality. The worst NPL pressure is usually felt in general commerce, manufacturing and holding companies’ loans. DBS and UOB have the highest proportions of such loans. We will be watching for a turning point in asset quality. We expect 2H DPS to be raised to S$0.30 (1H: $0.28).