DBS - Loan loss provision higher than expected

Overall, DBS delivered a strong 2Q09 underlying result partly offset by higher than expected provisions. Profit $552m vs. DB $445m and consensus $434m while DPS of 14cps was unchanged and in line. With upside surprise driven by both revenues and expenses it appears the underlying business is perfoming better than we anticipated and given the stock is trading well below our $16.50/share target price we maintain our Buy rating.

Pre-provision profit of $1,161m was 18% above DB forecast with revenue 8% ahead of expectations and expenses down 1% QoQ. Although net interest income grew 3% QoQ (peers -4%) with NIM +2bps, non interest income was the key revenue driver (+16% QoQ). This growth was broad based but pleasingly fees and commissions were up 13% QoQ on higher broking and investment banking fees. Given fee income is still 11% below previous highs we believe this emerging trend has further to go.

The provision expense of $466m (+13% QoQ) was above our $423m while NPLs increased to 2.8% from 2.0% 1Q09, an increase more pronounced than for peers. Although we think this was well anticipated by the market the composition is notable with HK credit quality benign (provision charge -19% QoQ to $71, NPA rate fell to 2.4% from 2.6%) and the Singapore provision charge +65% QoQ to $372m. However the Singapore NPA rate barely moved (1.3% vs 1.2% 1Q09) and given DB economists are forecasting an economic rebound for Singapore in '10e we believe this increase in loan losses is unlikely to be sustained.

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