Better margins, loan growth, non-interest income cushion DBS against Swiber fallout

Singapore

THE three local banks' second quarter results were not expected to be exciting, rather a confirmation that loans, margins and earnings would be either flat or on a slow slide reflecting the weak economy and market uncertainties, all of which flew out the window when oil services firm Swiber Holdings dropped its bombshell.

The collapse of Swiber on July 28 has hijacked attention from the banks' core lending business, which is healthy, and brought their exposure to the oil and gas sector front and centre though it represents between 4 and 6.6 per cent of total loans.

DBS Group Holdings, the last of the three to post Q2 results on Monday, confounded expectations by posting higher than expect net profit of S$1.05 billion, despite taking a S$150 million hit from Swiber.

That compared with the S$1.07 billion average of five analysts in a Bloomberg survey compiled before DBS revealed losses related to Swiber.

DBS' results were strong, as it sold more loans with higher margins, giving it the cushion for the Swiber loss. It also enjoyed improved non-interest income, reflecting its multiple franchises.

Total income rose 8 per cent to a new quarterly high of S$2.92 billion as business momentum picked up during the quarter. Loans expanded 4 per cent, led by corporate loans and market share gains in Singapore housing loans. Fee income climbed to a quarterly record.

DBS chief executive Piyush Gupta said he expects the full-year loan growth in mid-single digit. Rivals OCBC Bank and United Overseas Bank, which posted results last month, also said they expect full-year loan growth in single digit.

DBS' cost-income ratio improved to 44 per cent as cost growth decelerated. Profit before allowances increased 10 per cent to S$1.63 billion.

Chief financial officer Chng Sok Hui said the strong profit before allowances for the quarter and the half year provided a substantial cushion for absorbing the additional net allowances.

DBS' non-performing loan rate rose to 1.1 per cent, and Mr Gupta said full-year NPL is not expected to exceed 1.3 to 1.4 per cent. The bank expects contagion from Swiber and has flagged S$900 million as weakness; it also sees weakness in small and medium enterprises and from China related steel business.

Non performing loans as expected rose also at OCBC and UOB, attributed mainly to the oil and gas sector.

OCBC chief executive Samuel Tsien said he has seen deepening issues in the oil-and-gas sector amid the oil rout, but does not see the stress broadening out, for now. OCBC has no exposure to Swiber.

UOB chief executive Wee Ee Cheong said the slump in the oil and gas and support sectors was a key concern for the bank, possibly over the next one to two years. UOB has over US$35 million exposure to Swiber.

Beyond the oil and gas woes, the other challenge the banks face is the lower for longer interest rates scenario, exacerbated by the decline in loans as businesses struggle in an anaemic economy. Full-year growth forecast is 1-3 per cent.

As the largest local bank, DBS enjoys superior funding cost. Its net interest margin (NIM) in Q2 rose to 1.87 per cent, up 12 basis points from a year ago and two basis points from Q1.

OCBC's NIM in Q2 was 1.68, up 1 basis point from a year ago while UOB showed a sharp fall of 9 basis point to 1.68.

Another strong performer at DBS was its non-interest income. Non-interest income was 13 per cent higher at S$1.09 billion. Net fee income rose 8 per cent to S$628 million, led by growth in investment banking, transaction banking and loan-related activities. Other non-interest income grew 22 per cent to S$458 million from higher trading income and gains from investment securities.

Non-interest income at OCBC and UOB was mixed.

For OCBC, its non-interest income was 16 per cent lower at S$788 million on falls in fee and commission income, largely from lower brokerage and investment banking income. OCBC's insurance unit also posted lower profit. Great Eastern Holdings recorded strong underlying insurance business growth during the quarter, but its quarterly earnings were affected by unfavourable financial market conditions which resulted in unrealised mark-to-market losses in its bond and equity investment portfolio.

OCBC's Q2 net profit of S$885 million, down 15 per cent from a year ago, was driven by a decline in investment income and unrealised mark-to-market losses in the insurance portfolio.

UOB enjoyed strong gains in its non-interest income which grew 13.9 per cent to S$813 million driven by higher net trading income. For Q2, UOB's net earnings of S$801 million, an increase of 5.1 on year was largely due to non-interest income growth.