DBS shares down on warning of higher provisions over O&G stress
Singapore
SHARES OF DBS fell more than 2 per cent on Friday, after the bank's chief warned of bigger specific allowances than expected, given the continued stress in the oil & gas segment.
This comes as the oil & gas service players still find it hard to regain pricing power that would allow them to cover expenses, and as the value of collaterals that back loans are expected to fall further, said the bank's chief executive officer, Piyush Gupta, at a press briefing.
DBS's net profit rose 8 per cent from a year ago to S$1.14 billion for its second quarter, against a Bloomberg estimate of S$1.16 billion from a poll of six analysts. It also missed slightly the average forecast of S$1.15 billion from five analysts compiled by Reuters.
The results translated to annualised earnings per share of S$1.76, up from S$1.67 a year ago. The bank also raised its dividend to 33 Singapore cents per share, up from 30 Singapore cents per share, for the first half of the year.
Shares of DBS closed down 59 Singapore cents at S$21.49, reflecting disappointment from the market in the flattish margins, and a rebound in new non-performance loan (NPL) formation in the oil & gas segment, said Fitch Ratings analyst Ng Wee Siang.
"The market, I suspect, expected more after a record Q1. The management's overall tone slanted towards the cautious side compared to the quarters before," added Mr Ng, noting the greater caution over the bank's oil & gas exposure in particular.
The higher earnings were boosted by a smaller provision taken for the second quarter. Total allowances were down 17 per cent at S$304 million on lower specific provisions, partially offset by the lack of a writeback in general provision done a year ago. Provisions are set aside to cover an estimated expected loss in the value of loans under stress. These allowances are taken out of earnings, and so impact the bottom line.
DBS's NPL ratio, meanwhile, rose to 1.5 per cent for the second quarter from 1.1 per cent a year ago. It is also up from 1.4 per cent a quarter ago.
Total income remained flat at S$2.92 billion for the three months ended June 30, 2017, as higher net interest income was offset by the impact of lower trading, investment and fixed asset gains.
Notably, the bank locked in a 6 per cent increase in loans, but this came against a 13 basis point decline in net interest margin (NIM) from a year ago to 1.74 per cent.
DBS also bucked the trend as the only local bank with no gain in NIM from a quarter ago, given the drag on NIM in Hong Kong, its second-largest market after Singapore. Mr Gupta said that the NIM squeeze in Hong Kong reflects strong liquidity in the market, which keeps rates down.
He painted a more cautious outlook for the oil & gas sector. In the first quarter of 2017, DBS had guided for specific provisions of S$1.1 billion (excluding Swiber) for the full year, and Mr Gupta now warns that this could edge out of that figure.
Excluding exposure to Swiber, DBS has a S$7 billion exposure to oil & gas support services. Of this, S$1.6 billion are to state-owned and government-linked shipyards, while the remaining S$5.4 billion are to private players and smaller names.
The bank kept expenses lower, with cost-to-income ratio at 43 per cent, down from 44 per cent a year ago.
Specifically, the bank's wealth management business is running at costs way below the industry level, as all of the bank's wealth business - from private banking to mass affluent - are running off a common and thus efficient, digital platform, said Mr Gupta. The bank has also kept staff costs sustainable by promoting internally, with Mr Gupta citing an example of a POSB bank teller who has moved to become a private banker.
DBS expects to add about S$20 billion in assets under management from ANZ, following its acquisition. Roughly a third of that wealth would come from the high net worth category. DBS expects to close the ANZ integration by the first quarter of 2018.
