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Quality earnings drive investors back to Singapore bank stocks

DBS Q1 profit up 3% at S$1.25b on higher loans and fee income jump; CEO says results reflect some degree of turnaround in global economy

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Mr Gupta: "We had to make up (for treasury markets' drop) . . . had broad-based improvement in the bottom line and top line in all our countries; Greater China, South and South-east Asia and rest of the world, reflecting some degree of turnaround in the global economy.
DBS

Singapore

DBS Group Holdings posted record first-quarter net profit on Tuesday due to higher loan sales and a sharp rise in fee income as it benefited from the turnaround in the global economy.

All three local bank stocks jumped on Tuesday as DBS's results reinforced their improved prospects from stronger growth in their key markets.

DBS's results followed that of United Overseas Bank which last Friday reported a Q1 net profit of S$807 million, up 5.4 per cent, which was above estimates.

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OCBC Bank will post its Q1 results on May 9.

DBS, South-east Asia's largest bank, said that net profit rose 3 per cent to S$1.25 billion, beating expectations as business momentum remained healthy with a stellar rise in fee income. DBS's earnings beat the average analyst forecast of S$1.03 billion to S$1.09 billion from Bloomberg and Thomson Reuters. Excluding one-time items, net profit rose one per cent to S$1.21 billion.

DBS

DBS chief executive Piyush Gupta said that the bank's results showed that business momentum was healthy, as it achieved S$2.89 billion income, up one per cent year on year and 4 per cent quarter on quarter despite a weak trading quarter and lower interest rates.

Treasury markets was "S$120 million short of last year", he said at a press briefing on the results.

Net interest margin fell sharply, down 11 basis points from a year ago.

"We had to make up . . . had broad-based improvement in the bottom line and top line in all our countries; Greater China, South and South-east Asia and rest of the world, reflecting some degree of turnaround in the global economy," he said.

Mr Gupta's remarks echo that of Prime Minister Lee Hsien Loong who in his May Day message noted that global growth was looking up and that it made him "cautiously optimistic" about the Singapore economy this year.

Singapore's economy expanded by a better-than-expected 2 per cent in 2016, and Prime Minister Lee Hsien Loong thinks there's a "good chance" that growth this year can exceed that figure.

If realised, this would put the 2017 GDP figure at the higher end of the government's official forecast of between one and 3 per cent.

DBS said that net interest income was unchanged from a year ago at S$1.83 billion as softer Singapore-dollar interest rates was offset by higher loan volumes, up 7 per cent in constant-currency terms to S$298 billion from growth in corporate, trade and Singapore housing loans.

The bank expects loan growth in 2017 to be a mid-single digit.

Net interest margin (NIM) for Q1 fell 11 basis points to 1.74 per cent from 1.85 per cent a year ago but up from 1.71 per cent for the previous quarter.

The average NIM for the year could reach 1.8 per cent if the US Federal Reserve increases interest rates two more more, he said. But recent data was unexpectedly soft and if the Fed does only one rate hike instead, NIM could average 1.77 per cent, said Mr Gupta.

Elaborating on the loans pipeline, he expects corporate loan growth to be slow as a number of clients have raised funds via bond issues.

Trade loans is, however, doing well; up 8 per cent quarter on quarter and 15 per year cent on year.

On its housing loans which was flat from a quarter ago and up almost 9 per cent from a year ago at S$64.6 billion, he expects the portfolio to add about S$4.5 billion for the full year.

For Q1, DBS booked S$2 billion of new home loans from new launches.

DBS did not grow its market share in housing loans in Q1, he said; it's 29 per cent market share had risen from 25 per cent over the last two years.

Mr Gupta said that rivals launched tactical low-cost home loan packages in Q1 which won't be sustained.

No one else in the home loan market is able to match DBS's three-year fixed rate package at 1.68 per cent, he said.

DBS's star performer was its wealth management business.

Net fee income for Q1 rose 16 per cent to a record S$665 million from a year ago. This was led by a 26 per cent increase in wealth management fees to a quarterly high of S$222 million from stronger sales of unit trusts and other investment products.

Mr Gupta said that he wasn't sure if wealth management's "standout" performance, which was also up 40 per cent quarter on quarter, could be maintained as there was some level of "animal spirits" in Q1.

Transaction service fees increased 11 per cent to S$157 million due to higher trade finance and cash management income. Investment banking fees doubled to S$45 million from increased equity and fixed income fees. Cards and loan-related fees were also higher.

Other non-interest income fell 15 per cent, or S$68 million, to S$390 million due to lower trading gains and a non-recurring net gain of S$38 million a year ago. Income from treasury customer sales was little changed at S$304 million with an increase in wealth management treasury sales offset by a decline in corporate treasury sales.

Allowances for Q1 rose 18 per cent to S$200 million; it was down 57 per cent from the previous quarter.

Non-performing assets (NPA) fell slightly to S$4.83 billion and the non-performing loan ratio was 1.4 per cent, up from one per cent year on year, and unchanged quarter on quarter.

NPL formation which had been high in recent quarters due to stresses in the oil and gas support sector, moderated and was offset by recoveries and write-offs.

Still, it's unwise to think the sector is out of the woods, Mr Gupta said. He expects total allowances for the year to come in around S$1.1 billion, similar to 2016, excluding Swiber Holdings. Total allowances had doubled to S$1.43 billion for 2016, including S$400 million for Swiber which collapsed and sought court protection in July.

Bernstein analyst Kevin Kwek was bullish on DBS with a price target of S$22.

Oil and gas credit quality concerns have weighed on all the three Singapore banks and, on the back of numbers reported by UOB last week as well, pressure seems to be abating, he said.

"DBS's metrics were a marked improvement on provisions, NPA formation (lowest since Q415), specific allowances, and coverage, while NPL remained stable at 1.4 per cent. This alone will send the stock higher."

DBS has done well, up 12 per cent year to date, said Carmen Lee, head of OCBC Investment Research who wrote before market close. "At current price, we maintain our 'hold' rating."

In the stock market on Tuesday, DBS closed at S$19.86, up 2.6 per cent. UOB soared 4.6 per cent to S$22.80 while OCBC rose 1.8 per cent to S$9.98.

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