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DBS says moratoria still masking Covid-19 damage; Q2 net profit down 22%

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DBS on Thursday posted a 22 per cent fall in second-quarter net profit, dragged by further provisions and flat total income.

DBS chief Piyush Gupta expects top line and net interest margin (NIM) – a key indicator of profitability for banks – to deteriorate over the rest of the year, as the full impact of interest rates continue to flow through its loan book.

Speaking to the media on the bank's second-quarter results on Thursday, Mr Gupta also flagged ongoing uncertainty, with the bank continuing to build up its general provisions, saying that the relief measures are still masking the true damage brought on by Covid-19.

Shares of DBS gained on Thursday, rising 67 cents, or more than 3 per cent, to S$20.50 as at 3.39pm.

It comes as Singapore's largest bank posted a 22 per cent fall in second-quarter net profit, with the drag coming from further provisions and flat total income. It was a "tough quarter", said Mr Gupta, as lockdowns across many of its markets in April and May, slower economic activity, coupled with the interest rate cuts hit the bank's earnings hard.

Net profit for the three months ended June 30, 2020 stood at S$1.25 billion, compared with S$1.60 billion in the same period a year ago. This is slightly under the consensus forecast of S$1.31 billion in net income from three analysts in a Bloomberg poll.

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Total income for the second quarter was largely flat at S$3.73 billion compared with S$3.71 billion in the year-ago quarter, with both net income and fee income falling from the same period a year ago. 

For the first half of the year, DBS saw a 7 per cent jump in total income to S$7.75 billion compared to a year ago, but Mr Gupta does not expect this to continue.

"We will give that up pretty much in the second half, and that's mostly (due to) interest rates," he said. "But net-net, I think the top line should come in close to flattish to last year."

DBS maintained its guidance for the rest of the year from Q1, where it indicated that full-year profit before allowances to be around 2019.

It also kept its guidance for total allowances of S$3-5 billion over two years, with S$1.9 billion taken in the first half. Provisions against bad loans in the second quarter surged to S$849 million, up from S$251 million in the year-ago quarter.

"At this stage, we are not seeing anything that would cause us to change our guidance that we gave at the end of the first quarter," said Mr Gupta.

The bank's total general provisions as at June 30, 2020 stood at S$3.8 billion, up from S$3.23 billion a quarter ago.

"The reality is nobody really knows how much the moratorium is masking at this point in time, and which is why I say we are watching it very closely because you only get a good sense of that when the moratoriums wind up," he said.

"One of the reasons why I'm building up a substantial general provision cushion is exactly because nobody really knows what is going to be the extent of the damage once the (relief) programmes run out."

The non-performing loan (NPL) ratio remains at 1.5 per cent with "no major NPLs", he noted.

The bank has about S$12.5 billion of its SME (small and medium enterprise) loan portfolio on moratorium, which is mostly equally split between Singapore and Hong Kong. These firms are all serving interest, and they "look to be okay" so far, said Mr Gupta.

On the consumer side, about S$5.7 billion of its loans are on moratorium, with most of it coming from the Singapore mortgage portfolio. Some 86 per cent of all its mortgage loans are owner occupied with loan-to-value (LTV) limits "below regulatory minimums", he said.

"Because they're well collateralised and LTVs are low, we don't expect that they will suddenly go into NPLs at the end of the year," he said, adding that the bank is still watching them "very cautiously and carefully".

The Singapore banking industry, along with the Monetary Authority of Singapore, is working together to minimise cliff effects when the moratoria taper off.

"That is something that we watch and make sure we have a plan to exit in a careful kind of manner," said Mr Gupta.

He also estimated that the interest rate cuts by the US Fed in March is costing DBS S$80 million a month, which could go up to S$100 million next year, which he considers a "big drag" on income.

NIM fell to 1.62 per cent from 1.91 per cent a year ago, and 1.86 per cent a quarter ago. The one-month Sibor as at Wednesday stood at an all-time record low of 0.25 per cent; the three-month Sibor of 0.438 per cent was at a level not seen since 2014.

DBS expects full-year NIM to come in at 1.6 per cent.

The bank saw record deposit inflows in the first half, led by inflows from current accounts and savings accounts, with momentum expected to continue. The excess deposits were deployed in risk-free assets, which diluted NIM but improved earnings and return on equity (ROE), DBS said. The bank's loan-to-deposit ratio as at June 30, 2020 stood at 84 per cent.

Expenses for the second quarter fell 4 per cent from a year ago to S$1.48 billion. 

ROE stood at 9.8 per cent, down from 13.4 per cent a year ago, but slightly stronger than the 9.2 per cent reported a quarter ago. The bank's CET1 ratio stood at 13.7 per cent.

The board declared a dividend of 18 cents per share for the second quarter, with the scrip dividend scheme applicable. Scrip dividends will be issued at the average of the closing share prices on Aug 14, 2020 and Aug 17, 2020. The move is in line with MAS’s guidance for local banks to moderate their dividends for 2020.

DBS pays dividend by the quarter. In the year-ago quarter, DBS paid a dividend of 30 cents per share. In the previous quarter, DBS paid a dividend of 33 cents per share. 

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