DBS sees 'episodic corporate stress' in portfolio; Q3 net profit down 20%

DBS chief executive Piyush Gupta said that the bank is seeing "some episodic corporate stress" in its portfolio, with expectations that non-performing asset (NPA) formation will trend upwards as government relief moratoriums expire in 2021.

In its third-quarter results briefing on Thursday, he told the media that there seems to be "no pattern" to the rise in new corporate NPAs in the quarter, with no specific country or industry dominating.

These NPAs come from a "handful" of clients, ranging from consumer goods companies in China to a state-owned enterprise in Indonesia, but with no one big item compared with Q1, said Mr Gupta.

DBS's new NPAs under the corporate segment rose to S$543 million in Q3, up from S$115 million in the previous quarter.

"With the amount of demand destruction that the world has seen this year, it is not unreasonable to expect that there will be some companies which will be in distress," he said. "My expectation is that as the government relief programmes start winding down, you will see NPA formation increase next year."

He added that it is still very hard to forecast the potential rates of default at this point in time, but DBS will still maintain its guidance for total allowances to S$3 billion to S$5 billion, with a large chunk of it conservatively set aside to fortify the balance sheet against macroeconomic risks.

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For its third quarter, South-east Asia's largest lender by assets saw its net profit fall 20 per cent to S$1.3 billion, hit by lower net interest income. This still came above market estimates of S$1.17 billion from four analysts, according to Refinitiv data.

Total income was down 6 per cent to S$3.58 billion, with both net interest income and fee income hurt, while trading income rose.

For the quarter, total allowances more than doubled from a year ago to S$554 million. Meanwhile, the bank's net performing loans (NPLs) ratio ticked up marginally to 1.6 per cent, from 1.5 per cent a year ago.

Third-quarter net interest income declined 12 per cent from a year ago to S$2.17 billion, given the fall in short-term interest rates. This comes as net interest margin (NIM) - a key profitability indicator for banks - fell from 1.90 per cent to 1.53 per cent as the impact of global interest rate cuts in March and April was more fully felt.

Net fee and commission income also slipped 2 per cent to S$798 million from a year ago, but it was a 17 per cent jump on a quarter-on-quarter basis. This comes as wealth management fees and card fees jumped 25 per cent and 22 per cent respectively, as sales of investment and insurance products increased with improved market sentiment in a low interest rate environment and consumer spending picking up from the easing of lockdowns.

Non-interest income rose 11 per cent to S$608 million, partly as profits were realised on investment securities, which had appreciated with lower interest rates.

The board has declared a third-quarter dividend of 18 Singapore cents per share, in line with guidance from the Monetary Authority of Singapore (MAS) for local banks to moderate dividends for FY20. This was unchanged from Q2.

During the briefing, Mr Gupta said that the lender will continue to be guided by MAS on the issue of dividends, but it is expecting to get dividends "back up to where we were". It won't raise dividends in "one fell swoop", but he said that DBS has the capacity to pay more dividends than what it is paying right now.

Prior to MAS's guidance, DBS had kept its quarterly dividend payout at 33 cents per share in the first quarter.

In the year ahead, Mr Gupta is expecting strong economic rebound in Asia, with loan growth of mid-single digits and double-digit fee income growth. This would partially offset the impact of lower NIM, he added.

With the worst not yet over for NIM and its impact on interest income, the bank will have to rely on fee income and other types of income to make up for it, Mr Gupta said. On the other hand, most of the provisions have already been taken this year - S$2.5 billion so far - with the amount next year expected to come down, he added.