Maintain stable net interest margin. Net interest income of S$1,112m (+5.1% yoy) was in line with our expectations. Loans contracted by 1.9% qoq but grew 8.3% yoy to S$130.4b. Professional & Private Individuals was the only sector that registered positive qoq growth of 3.0%. HK$- denominated loans contracted 3.7% qoq to S$29.1b due to the strength of the S$. Net interest margin was marginally higher at 2.01% on a group-wide basis, compared to 1.99% in 1Q09. Improved credit spreads and lower funding cost were offset by lower SIBOR. Net interest margin for Hong Kong improved from 1.91% in 1Q09 to 1.94% in 2Q09.
Recovery from market-sensitive businesses. Fees & commissions of S$358m were up 13% qoq and above our expectations. DBS benefited from the recovery in market-sensitive businesses with strong contributions from stockbroking (+78.6% qoq), investment banking (+58.8% qoq) and wealth management (+31.3% qoq). Sales of unit trusts started to recover in 2Q09. Net trading income was a whopping S$234m due to foreign exchange and interest rate activities. DBS also recognised investment gains of S$138m from the sale of equity holdings.
Focus on improving productivity. Staff cost and other expenses were well under control. Cost/income ratio improved from 38.4% in 1Q09 to 35.2% in 2Q09, as a result of management’s focus on improving productivity. DBS has started to exploit its advantages in having economies of scale.
Core markets resilient. NPL ratio increased from 2.0% in 1Q09 to 2.8% in 2Q09. The bulk of new NPLs came from the "others" category, likely to be a financial institution and currently labelled under the substandard category. Management explained that the increase was from Middle East corporations and institutions (partly from 50%-owned Islamic Bank of Asia). NPLs from core Hong Kong and Greater China markets declined 10.6% and 10.7% qoq respectively. The proportion of NPLs not overdue is 38.2% (1Q09: 34.2%), indicating that asset quality remains sound.
Specific provisions of S$272m and general provisions of S$183m were significant, totalling 138bp on an annualised basis. However, NPL coverage has dropped from 97% in 1Q09 to 81% in 2Q09.
Loan growth picking up in 2H09. DBS has built a strong pipeline in residential mortgages and corporate loans. It has aggressively expanded in housing loans in Singapore, participating mainly in the owner-occupied and upgraders’ market. It offered 90% financing in the early part of 2Q09 but has since “clamp down”. It currently offers 90% financing only on a case-by-case basis. Disbursement for housing loans will be more pronounced in 2H09. Tier 1 CAR was maintained at 12.6%. DBS has declared a dividend of 14 cents/share, unchanged compared to the last quarter.
We have raised our assumptions for loan growth to 5.7% for 2009 (previously 7.8%) and 11.7% for 2010 (previously 8.2%) to factor in increased demand from property developers and housing loans. We have revised our assumptions based on trends in NPL ratios over the last three quarters. We assumed NPL ratio will hit 4.0% by end-10. Our earnings model has imputed allowance for credit losses of 120bp in 2H09 (previously 120bp) and 60bp in 2010 (previously 80bp). We have raised our 2009 and 2010 net profit forecasts by 14.0% and 11.5% respectively.
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