DBS Q1 profit down 10% to S$1.8b; CEO expects 'significant' upside from impending rate hikes

SINGAPORE’S largest bank DBS reported a net profit of S$1.8 billion for the first quarter ended Mar 31, 2022, down 10 per cent from the record S$2.1 billion posted a year ago.

In a media conference on Friday (Apr 29), the bank's top executives stressed the high base for wealth management and treasury markets activities it the year-ago period while noting that the Q1 earnings are still its second-highest on record.

“Buoyant market sentiment and clear market momentum" had driven income from both activities to "exceptional levels” last year, the bank said.

"As we are going into the second quarter, I think we're tracking closer to last year's levels. But relative to last year, overall there could prove to be a little bit of headwind," DBS chief executive Piyush Gupta said.

He also stressed that DBS is in good stead to reap gains from rising interest rates - a point banking analysts agreed on.

The bank's Q1 earnings were in line with a S$1.88 billion consensus estimate from analysts polled by Bloomberg. Total income for the quarter fell 3 per cent to S$3.75 billion, from S$3.85 billion a year ago.

DBS declared an interim dividend of 36 Singapore cents a share. 

Net interest income for the quarter rose 4 per cent from the year-ago period to S$2.19 billion. Loans grew 8 per cent, or S$30 billion, year on year. Non-trade corporate loans rose 2 per cent on the previous quarter, led by Singapore and Hong Kong, while trade loans grew 5 per cent amid rising commodity prices.

Deposits were up 9 per cent, or by about S$41 billion. Current and savings accounts (CASA) made up 75 per cent of customer deposits.

Net interest margin stood at 1.46 per cent, up 3 basis points from the previous quarter. This was DBS's first increase in net interest margin in 3 years.

Net fee income fell 7 per cent from a year ago to S$891 million amid weaker market sentiment, with wealth management fees down 21 per cent to S$408 million. Investment banking fees fell 12 per cent to S$43 million.

Other fee income activities, including loan-related fees, card fees and transaction service fees, were higher.

Other non-interest income fell 16 per cent to S$669 million from lower trading income and lower investment gains.

The environment for investment banking continues to be challenging, but continued market volatility could be beneficial for the bank's treasury and markets business, Gupta said on Friday.

The bank is also expecting a "big (earnings) upside" from a faster pace (of) interest rate hikes, he said. It has guided for S$1.8 billion to S$2 billion of incremental net interest income for every 100 basis points rate hike by the Federal Reserve.

DBS’ non-performing loan ratio Q1 FY22 stood at 1.3 per cent for the quarter. There was a general allowance write-back of S$112 million from credit upgrades and transfers to non-performing assets.

Amid rising interest rates, the bank can afford to take a more cautious approach towards provisions, Gupta said. "If we get a lot of benefit and tailwind on interest rates, we might hang on to those general provisions for longer," he said.

Moody's Investors Service vice-president and senior credit officer Eugene Tarzimanov said DBS's is better positioned than its local peers to benefit from higher interest rates as it has a higher share of low-cost CASA deposits.

He added that the potential removal of a penalty imposed by the Monetary Authority of Singapore for a 2-day digital outage last year could offer a tailwind for the lender's capital position.

DBS' Common Equity Tier 1 capital ratio stood at 14.0 for the quarter.

Gupta also said the bank will make its cryptocurrency offerings via the DBS Digital Exchange available on mobile banking for accredited and institutional investors. Trades are currently booked through the phone.

On why the bank would not be letting retail customers come on board the digital exchange as intended earlier, he cited tech and regulatory factors.

"I would have liked to see (it expanded) to retail this year, but (there are) 2 things: One, it's taking a little bit longer than I anticipated to put the technology apparatus and the processes around it.

"Also, regulators are not that comfortable. Around the world, regulators are a little bit more careful about letting retail access to crypto... We will start getting our arms around that, at the earliest, next year."

DBS' earnings per share was S$2.81 for the quarter.

DBS shares ended Friday up 2.76 per cent or S$0.91 to S$33.92.