Singapore: Southeast Asia’s biggest lender DBS posted a record quarterly profit thanks to falling bad-debt charges and a surge in trading income, and signalled that an erosion in interest rate margins in its core markets may be coming to an end.
Low interest rates in Singapore have been the Achilles heel of local banks, preventing them from fully exploiting a rebound in loan growth as Asian economies recovered from the financial crisis.
DBS’s latest earnings showed that net interest rate margins, although down by 13 basis points from a year earlier, were fractionally up at 1.80% from the fourth quarter.
But analysts warned that a rise in margins was unlikely before the end of the year, with the US Federal Reserve unlikely to rush into tightening monetary policy.
Singapore’s central bank does not target interest rates when managing monetary policy, so interest rates move in tandem with US rates.
“We maintain our view that the rate cycle may not turn until late in the second half of 2011 and hence remain cautious on the margin outlook,” said Ching Seng Tay, a Bank of America’s Merrill Lynch analyst.
DBS posted a net profit of S$807 million ($657 million) for January-March against S$532 million a year earlier. That compared with an average forecast of S$685 million, according to seven analysts surveyed by Reuters.
DBS’s result exceeded the previous record net profit of S$722 million posted in July-September last year.
It was the third straight quarter that DBS posted better-than-expected earnings, highlighting CEO Piyush Gupta success in turning around the bank since he took over in November 2009.
“I couldn’t have asked for a better set of results frankly, if I had written the script myself,” said Gupta at a briefing.
DBS return on equity improved to 12.12%, up from 10.2% in the fourth quarter.
The bank earned 78% of its net profit from Singapore and Hong Kong in the first quarter.
Harsh Wardhan Modi, an analyst at JPMorgan, said the result marks the bank’s structural shift in profitability.
“The stock remains our top pick,” he said. DBS shares briefly rose to their highest level in almost three months following the earnings report, but gave back gains and were down 0.4% by midday trade, reacting to the broader weakness in the market.
Bad-debt charges declined 65% to S$125 million from a year ago and 20% from the fourth quarter. Net interest income rose 5% to S$1.12 billion as net interest margins declined to 1.80% from 1.93% from a year earlier, but were little changed from the fourth quarter.
DBS said loan growth rose 18% from a year earlier amid strong corporate borrowings in Singapore, Hong Kong and other Asian markets.
Fees and commission income rose 22% to S$416 million, while trading income rose 12% from a year earlier and 57% from the fourth quarter.
The first quarter saw the listing of Hong Kong billionaire Li Ka-shing’s $5.5 billion Hutchison Port Holdings Trust’s IPO in Singapore, a deal advised by DBS.
Nomura analyst Anand Pathmakanthan said there was positive upside for DBS on a combination of improved loan growth expectations, faster-than-expected improvement in margins and higher non-interest income such as fees.
As of Thursday, DBS shares were up about 4.2% so far this year, undperforming a 9.7% rise in rival United Overseas Bank’s shares. Shares of Oversea-Chinese Banking Corp have fallen about 3.8% so far this year after gaining about 9% in 2010.