DBS chief more hopeful on asset quality; Q4 profit falls 33%

DBS is seeing encouraging signs on overall asset quality in 2021 as moratoriums gradually taper off, with extensions on debt holidays contained and delinquencies kept low.

At a media briefing on Wednesday, DBS chief Piyush Gupta projected for total allowances over 2020-2021 to come in at the middle of the S$3-5 billion range as loans under moratorium have come down significantly from their respective peaks.

"If you look at the totality of our corporate loan book, we're not seeing a lot of more weakness in our corporate names. There's a good chance that allowances will come in at the lower end of the S$3-5 billion range, certainly S$4 billion or south of that, I think it's quite possible," he told reporters.

"Our guesses are that we're not going to need as much credit provision as originally anticipated. I'm certainly feeling more optimistic about the overall quality of the portfolio and asset conditions now than I was able to tell you three months or six months ago," he added.

OCBC Investment Research on Wednesday raised its fair value on DBS to S$29.50, reflecting a firmer recovery outlook ahead, with its "buy" call intact. "Double-digit fee income growth (is) expected, while the bulk of NIM pressure looks largely played out." The brokerage's fair value on DBS as at Nov 5, 2020 was S$24.50.

Eugene Tarzimanov, vice-president, senior credit officer at Moody's Investors Service, said: "DBS wrapped up a turbulent 2020 with a very strong balance sheet, supported by good asset quality, high capital and excess liquidity. We expect credit costs to decrease in 2021 as DBS has already completed the bulk of provisioning, with asset risks receding and economic conditions improving."

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Singapore's largest lender kicked off the banks' fourth-quarter results season on Wednesday, reporting a net profit of S$1.01 billion for the fourth quarter ended Dec 31, 2020, down 33 per cent from a year ago due to lower net interest margin (NIM) and higher allowances.

A final dividend payout of S$0.18 per share will be paid around May 24 to which a scrip dividend scheme will be applied, compared with S$0.33 a year ago. This is in line with the regulator's guidance to cap dividends in 2020. It remains unclear if the cap will be lifted this year, said Mr Gupta.

DBS's annualised earnings per share stood at S$1.54 for the quarter, down from S$2.31 a year ago.

Total allowances in Q4 came in almost five times higher than the year-ago period at S$577 million.

For the full year ended Dec 31, 2020, total allowances stood at S$3.07 billion, of which over 50 per cent, or S$1.71 billion, were parked under general provisions. Taking the bank's 2020-2021 guidance into consideration, this implies about S$1 billion of total allowances in 2021.

As the bulk of moratoriums expire in end-2020, the majority, or 90 per cent, of DBS's housing loans under moratorium were not extended.

About 25 per cent of DBS' SME clients in Singapore who were on government moratorium schemes have applied to continue deferring repayments on their loans. (see amendment note)

Moratorium extension numbers are highest in the bank's Hong Kong loan book. At its peak, loans under moratorium stood at around S$6.5 billion. About half are currently under extension, said Mr Gupta.

"A chunk of that is from large corporates and large corporates are generally okay. I think they've taken a moratorium only because it gives them cheaper money," he said.

Overall, he noted that extended moratorium schemes are being contained, while delinquencies arising from customers who started repaying their loans are also low.

That said, he flagged that some delinquency in the consumer space is still shrouded by government relief measures. The bank will get a more definitive sense of moratorium impact when extended helplines expire by mid-2021.

DBS's non-performing loan ratio in 2020 was stable at 1.6 per cent, even after adding S$212 million of new net non-performing assets from its Lakshmi Vilas Bank deal in India last November.

Despite improved macro conditions, there were no plans to write back provisions in Q4. Its total allowance coverage stands at 110 per cent.

Mr Gupta said: "If you look at some of the banks, especially US banks, they chose to take the improved conditions in the fourth quarter to start writing bank reserves. We opted not to do that, our view is that we can use the fourth quarter to continue to fortify our balance sheet so that any potential vulnerabilities for 2021 are proactively dealt with in 2020."

From a topline standpoint, the bank's "biggest challenge" is its Hong Kong market. This comes as the market still relies heavily on cross-border traffic flows with China, which has not been reopened, said Mr Gupta. DBS's full-year net profit in Hong Kong was down about 34 per cent year on year.

The group's net interest income in the fourth quarter declined 13 per cent to S$2.12 billion as NIM came in at 1.49 per cent, down 37 basis points from a year ago but only four basis points lower than Q3 as interest rates stabilised.

DBS guided for 2021 NIMs to remain in the range of 1.45 to 1.5 per cent, offsetting a guided mid-single digit loan growth.

Net fee income was S$747 million or 1 per cent higher than a year ago, with higher wealth management fees offset by lower contributions from other activities.

The bank noted that even as card spending from travel remained subdued, cards fees for the fourth quarter fell 12 per cent, moderating from the year-on-year declines of 21 per cent and 34 per cent in Q3 and Q2 respectively.

Other non-interest income rose 35 per cent from a year ago as a result of higher trading income, though this was 35 per cent lower compared to the previous quarter due to seasonal factors. Expenses for the quarter were a marginal 1 per cent drop from a year ago at S$1.58 billion compared to S$1.6 billion previously.

Over the quarter, DBS recorded amalgamation expenses of S$33 million and general allowances of S$87 million for Lakshmi Vilas Bank (LVB), which was amalgamated on Nov 27, 2020 with provisional goodwill of S$153 million.

The bank's Q4 results brings its net profit for H2 and the full year to S$2.31 billion and S$4.72 billion respectively, both representing a 26 per cent decline from a year ago.

Over the year, NIM declined 27 basis points to 1.62 per cent.

Shares of DBS closed up seven cents to finish on Wednesday at S$26.

Amendment note: An earlier version of this article stated that about 25 per cent of the bank's Singapore small and medium-sized enterprise (SME) loan book is under extended moratorium. It is in fact 25 per cent of DBS' SME clients in Singapore who were on government moratorium schemes that have applied to continue deferring repayments on their loans.