11% rise to $610m despite CDO-linked allowances and loss and TMB impairment
DBS Group Holdings beat analysts' expectations with a third-quarter net profit of $610 million, 11 per cent higher than the previous year's corresponding quarter's $552 million.
Mr Tai: Said that the search for his successor is continuing and refused to comment on whether ex-SingTel chief Lee Hsien Yang would be chosenThis was despite the group's allowances and mark-to-market loss relating to collateralised debt obligations (CDOs) and an impairment charge for its stake in Thailand's TMB Bank.
The Q3 net profit compared favourably with an average forecast of $481 million from five analysts polled by Reuters.
DBS said that although none of its $2.36 billion of CDOs as at Sept 30 has defaulted, it has set aside allowances of $70 million for the $275 million of collateralised debt obligations (CDOs) that had some exposure to US sub-prime assets. This comprised $43 million in specific and general allowances charged to the profit and loss account and $27 million marked against existing cumulative general allowances. There was also a mark-to-market loss of $42 million charged to net trading income relating to CDOs held by Red Orchid Secured Assets (Rosa), a fully-consolidated conduit managed by DBS.
A separate impairment charge of $38 million was taken for DBS's 16 per cent stake in Thailand's TMB Bank. This further impairment charge - which came after another charge in the previous quarter - was to reflect a further reduction in TMB's market valuation. DBS reiterated that it will not inject new funds into TMB Bank, unless it can get sufficient management control to effect business and operational changes.
Without the $38 million impairment charge, DBS's net profit attributable to shareholders would have been $648 million, a year-on-year rise of 17 per cent.
'The global credit squeeze caused by the US sub-prime mortgage-related concerns affected DBS's result in two areas, structured credit and credit trading activities, as well as CDO-related charges,' outgoing chief executive Jackson Tai said, adding: 'We have prudently set aside reserves even though there have been no credit defaults in any of our CDO holdings.'
He took pains to emphasise that the bank's $275 million of CDOs that had some exposure to the US sub-prime mortgage compose less than 0.12 per cent of its total assets and the overall $2.36 billion exposure to CDOs is about 1 per cent of the total assets.
For the first nine months of the year, net profit after one-time items was $1.79 billion, a year-on-year rise of 7 per cent. Excluding one-time items, net profit came in at $1.93 billion, up 19 per cent.
Net interest income - or profit from loans and also the bank's core business - grew 15 per cent from a year ago to $1.05 billion, marking the 11th consecutive quarter of growth. Customer loans hit a record $104.7 billion, up 23 per cent from a year ago, led by corporate and SME loans in Singapore and Hong Kong. Singapore housing loans also continued to grow strongly, the bank said.
Net interest margins - the difference between what the bank earns on loans and pays on deposits - dropped from the previous quarter to 2.14 per cent as interest spreads in Hong Kong and Singapore fell.
Looking ahead, chief financial officer Jeanette Wong said: 'I'm not surprised we will face pressures on our net interest margins, since prime Hibor spreads have been narrow and Singapore interest rates are trending down, so we might face margin pressures going into the fourth quarter.'
On the non-interest income front, the bank achieved record fee income on the back of more fees from stockbroking, investment banking, loan syndication and wealth management.
Net fee income increased 38 per cent from a year ago to a record $403 million. However, trading income recorded a net loss of $47 million compared with a net trading income of $100 million in the previous quarter. Wider credit spreads for trading securities and credit-linked derivatives were blamed for the negative trading income.
Expenses climbed 12 per cent from a year ago due to higher staff and IT costs, but the bank's cost-income ratio improved to 42 per cent from 44 per cent a year ago.
A quarterly dividend of 20 cents per share was declared.
On the issue of his successor, Mr Tai said: 'I don't have an update for you, I can assure you the process (of searching for a successor) continues and there are many good candidates.' Mr Tai leaves the bank at the end of this year after five years as CEO, and said that he will be returning to New York.
Responding to a question on whether former SingTel chief Lee Hsien Yang would succeed him as CEO, he said: 'I cannot comment on a specific individual.'
Shares of DBS ended 70 cents or 3.3 per cent higher at $22 yesterday.
Singapore's two other local banks - United Overseas Bank and Oversea-Chinese Banking Corp - are due to report their results on Oct 30 and Nov 6 respectively.
Related Link -
http://tinyurl.com/22dpla
DBS Group's news release
http://tinyurl.com/2bexwe
Performance summary
http://tinyurl.com/2eoepq
Presentation slides
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