DBS Undented By CDOs

Source : Weekend TODAY, October 27, 2007

NONE of DBS Group Holdings’ $2.36 million of collateralised debt obligations (CDOs)as of Sept 30 defaulted but the bank said at its third-quarter earnings briefing yesterday that it recorded $112 million in CDOrelated provisions and losses for the period.

The figure includes $70 million in allowances set aside for the $275 million CDOs that had some exposure to United States subprime assets, while $42 million was a mark-to-market loss relating to CDOs held by its conduit, Red Orchid Secured Assets.

Speaking to TODAY, Mr Jackson Tai, DBS’ outgoing vice-chairman and chief executive officer, said: “I think we weathered the storm pretty well … Our provisions of $70 million is a prudential reserve against a portfolio that has only $275 million of CDOs exposed to the US sub-prime mortgage market. That’s 0.12 per cent (of CDOs to DBS’ total assets) — very small but we think that, nonetheless, it’s very important to set aside some reserves and we’re comfortable with those reserves and believe we’ll do just fine.”

Mr Tai said the bank was “pretty conservative with the write-down”, and that it’s “confident” about the portfolio.

For the third quarter, South-east Asia’s largest bank by market capitalisation said net profit was $648 million, which excluded an impairment charge of $38 million for its 16-per-cent stake in Thai lender TMB Bank to reflect its market valuation as at Sept 30. For the nine months, net earnings were up 19 per cent year-on-year to $1.93 billion.

“Results for the quarter were reassuring despite turbulence in the global credit markets. We took steps over the past five years to diversify our earnings across businesses and geography to supplement our strength in corporate banking and the markets. During the quarter, this diversification delivered solid results despite disruptions on some areas of our treasury and markets business,” Mr Tai said.

He said net interest income and fees rose to new highs while customer loan volumes also rose. The net interest income was $1.05 billion, up 15 per cent from a year earlier, while loans grew 23 per cent to $104.7 billion. The net interest margin,
though, shrank a tad to 2.14 per cent from 2.17 per cent a year earlier.

Daiwa Institute of Research analyst David Lum said the DBS statement on its CDOs held no surprise and investors were relieved that its “earnings growth was not affected”.

“The direct exposure to the sub-prime crisis is insignificant. Local banks are small and not directly affected by the sub-prime crisis and DBS’ provisions seem like a realistic charge to take,” he said.

DBS, the first of the big three banks to report third-quarter earnings, helped alleviate concerns over its CDO exposures, and the shares rose 3.3 per cent to $22.
United Overseas Bank advanced 2.9 per cent to $21.60 and OCBC Bank was up 1.7 per cent to $9.10.

The Straits Times Index closed at 3771.55 points, up 1.7 per cent. Gainers outnumbered losers 519 to 306 and the volume traded was 2.54 billion shares, up slightly from 2.49 billion shares on Thursday.

DBS Vickers said the likelihood of an STI correction low at 3650 points has increased.