DBS sees margin squeeze as interest rate cuts bite in Q2

Singapore

DBS chief Piyush Gupta expects top line and net interest margin (NIM) - a key indicator of profitability for banks - to deteriorate over the rest of the year as it battles interest rate headwinds that threaten to drag down income.

Speaking to the media during the release of the bank's second-quarter results on Thursday, Mr Gupta also flagged continued uncertainty, with the bank continuing to build up its general provisions ahead of expected loan quality weakening as moratoriums wear off.

It comes as Singapore's largest bank posted a 22 per cent fall in second-quarter net profit, with the drag coming from further provisions and flat total income. It was a "tough quarter", said Mr Gupta, as lockdowns across many of its markets in April and May, slower economic activity, coupled with the Fed interest rate cuts hit the bank's earnings hard.

Net profit for the three months ended June 30, 2020 stood at S$1.25 billion, compared with S$1.60 billion a year ago. This is slightly under the consensus forecast of S$1.31 billion in net income from three analysts in a Bloomberg poll.

Total income for the second quarter was largely flat at S$3.73 billion compared with S$3.71 billion in the year-ago quarter, with both net interest income and fee income falling from the same period a year ago.

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For the first half of the year, DBS saw a 7 per cent jump in total income to S$7.75 billion compared to a year ago, but Mr Gupta does not expect this to continue.

"We will give that up pretty much in the second half, and that's mostly (due to) interest rates," he said. "But net-net, I think the top line should come in close to flattish to last year."

DBS maintained its guidance for the rest of the year from Q1, where it indicated that full-year profit before allowances to be around 2019 levels.

It also kept its guidance for total allowances of S$3-5 billion over two years, with S$1.9 billion taken in the first half. In the second quarter, provisions against bad loans surged to S$849 million, up from S$251 million in the year-ago quarter.

"At this stage, we are not seeing anything that would cause us to change our guidance that we gave at the end of the first quarter," said Mr Gupta.

The bank's total general provisions as at June 30, 2020 stood at S$3.8 billion, up from S$3.23 billion a quarter ago and 24 per cent above the minimum requirement.

On potential NPLs in the absence of moratoriums, he said: "The reality is nobody really knows how much the moratorium is masking at this point in time, and which is why I say we are watching it very closely because you only get a good sense of that when the moratoriums wind up."

"One of the reasons why I'm building up a substantial general provision cushion is exactly because nobody really knows what is going to be the extent of the damage once the (relief) programmes run out."

The non-performing loan (NPL) ratio remains at 1.5 per cent with "no major NPLs", he noted.

The bank has about S$12.5 billion of its small and medium-sized enterprise (SME) loan portfolio on moratorium, which is mostly equally split between Singapore and Hong Kong, mostly secured against property. These firms are all serving interest, and they "look to be okay" so far, said Mr Gupta.

On the consumer side, about S$5.7 billion of its loans are on moratorium, with most of it coming from the Singapore mortgage portfolio. Some 86 per cent of all its mortgage loans are owner occupied with loan-to-value (LTV) limits "below regulatory minimums", he said.

"Because they're well collateralised and LTVs are low, we don't expect that they will suddenly go into NPLs at the end of the year," he said, adding that the bank is still watching them "very cautiously and carefully".

The Singapore banking industry, along with the Monetary Authority of Singapore, is working together to minimise cliff effects when the moratoria taper off. "That is something that we watch and make sure we have a plan to exit in a careful kind of manner," said Mr Gupta.

He also estimated that the interest rate cuts by the US Fed in March is costing DBS S$80 million a month, which could go up to S$100 million next year, which he considers a "big drag" on income.

NIM fell to 1.62 per cent from 1.91 per cent a year ago, and 1.86 per cent a quarter ago. The one-month Sibor as at Wednesday stood at an all-time record low of 0.25 per cent; the three-month Sibor of 0.438 per cent was at a level not seen since 2014.

DBS expects full-year NIM to come in at 1.6 per cent, partly due to a deliberate move to deploy excess deposits in risk-free assets, which dilutes NIM but improves earnings and return on equity (ROE).

This comes as the bank saw record deposit inflows in the first half, led by inflows from current accounts and savings accounts, with momentum expected to continue in the second half of the year.

ROE stood at 9.8 per cent, slightly stronger than the 9.2 per cent reported a quarter ago. The bank's common equity tier one (CET1) ratio, a measure of its financial strength, stood at 13.7 per cent, down from 13.9 per cent in the previous quarter, but still well within DBS' operating target of between 12.5-13.5 per cent.

Expenses for the second quarter fell 4 per cent from a year ago to S$1.48 billion.

During the briefing, Mr Gupta said that the bank is reviewing its cost structures as it faces a "challenging environment".

However, he said, the bank does not have "any intent to cut jobs through the course of this year", with the review aiming to restructure its business for the future.

Despite the drop in income in Q2, DBS had green shoots in several fee income segments towards the end of the quarter.

Wealth management investment income rebounded from trough in April to pre-Covid levels, while cards and bancassurance also improved their showing, but still remain below pre-Covid levels.

Unrealised mark-to-market gains in investment securities is also expected to provide cushion for lower NIM, said Mr Gupta.

The board declared a dividend of 18 Singapore cents per share for the second quarter, with the scrip dividend scheme applicable. Scrip dividends will be issued at the average of the closing share prices on Aug 14, 2020 and Aug 17, 2020. The move is in line with MAS' guidance for local banks to moderate their dividends for 2020.

DBS pays dividend by the quarter. In the year-ago quarter, DBS paid a dividend of 30 Singapore cents per share. In the previous quarter, DBS paid a dividend of 33 Singapore cents per share.

Shares of DBS rose on Thursday, rising 57 Singapore cents to close at S$20.40.

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