DBS Group Performance for 1998

1  FINANCIAL HIGHLIGHTS

1.1       Despite a difficult operating environment since the Asian crisis started in the second half of 1997, Group operating profit rose by 13.0% to S$1,151.7m in 1998. Excluding the consolidation of POSBank and Thai Danu Bank (TDB), growth would have been 7.9% yoy.

1.2       Total provisions for 1998 were S$996.4m in 1998 compared to S$495.5m in 1997. The higher provisions were due to an increase in non-performing loans (NPLs) and, as a measure of prudence, the Group continued to set aside more special general provisions to cover its exposure to countries in the region.

1.3       As a result, Group after-tax profit was S$222.7m compared to S$436.4m in 1997. Excluding the contribution from POSBank and losses at TDB, Group after-tax profit would have been S$316.0m.

1.4        Group total Capital Adequacy Ratio, measured according to BIS guidelines, was 15.6%, or almost twice the 8% minimum international requirement. In addition, unrealised valuation surpluses in quoted investments and properties amounted to S$1,420.0m.

1.5      Total interim and final dividends per share are unchanged at 18 cents. Net dividend payout increased from S$93.5m to S$123.4m due to an enlarged ordinary share capital following the bonus and rights issues in 1998.

2  PERFORMANCE SUMMARY

2.1        A summary of DBS Group’s performance is in Table 1.

Table 1 : Summary of DBS Group’s Performance

2.2       The Group’s performance included the consolidation of the results of its acquisitions in 1998, namely Thai Danu Bank (TDB), DBS Bank Philippines (DBSP) and, The Post Office Savings Bank of Singapore and Credit POSB Pte Ltd (collectively, POSBank).

2.3       Goodwill arising from the acquisitions amounting to S$721.2m was written off against DBS Bank’s capital and revenue reserves. This included writing down the investment in TDB by S$260.0m to zero value.

2.4       In the first half of 1998, the value of the investment in TDB was written down from its book net tangible asset value (NTA) of 27.8 baht per share to its par value of 10 baht per share. This writedown reflected a provision level of 13.5 billion baht (S$609m). Since then, a more indepth review of TDB’s loans has been performed in conjunction with Price Waterhouse, our external auditors, and DBS Group made further provisions of 11.5 billion baht (S$526m) in the second half of 1998, of which :-

1. 5.5 billion baht (S$254m) is attributed to the pre-acquisition period and hence DBS Bank’s share of the further decline in NTA of TDB (S$128m) was debited to its capital and revenue reserves. With this, the value of DBS Bank’s investment in TDB had been written down to zero; and
2. the remaining 6 billion baht (S$272m) is attributed to further deterioration in asset quality since the acquisition and reflected as a provision charged to DBS Group’s profit and loss account. Hence, DBS Group’s net profit attributable to members was impacted by DBS Bank’s share of the provision amounting to S$137m.

Loan grading and provisions for NPLs in TDB have been made in conformity with DBS’ policy. Accordingly, full provisions for TDB’s NPLs were made in the Group accounts as at 31 Dec 1998 instead of phased provisioning up to 31 Dec 2000 allowed by the Bank of Thailand.

2.5        Group operating profit rose by 13.0% to S$1,151.7m in 1998, contributed mainly by an increase in net interest income. The higher net interest income was due to an increase in interest-earning assets as a result of the consolidation of POSBank and TDB, as well as an improvement in overall interest margin.

Excluding the consolidation of POSBank and TDB, growth in operating profit and net interest income would be 7.9% and 15.6%, respectively.

2.6       Given the continuing difficult environment, substantial provisions continued to be made. Details of these provisions are in Table 2.

Table 2 : Total Provisions For DBS Group

2.7        Total provisions made in 1998 amounted to S$996.4m. This included specific provisions of S$272.0m for TDB’s loans, S$322.5m for loans to the Regional Countries (excluding TDB) and S$339.8m for loans to Singapore and other countries. The higher specific provisions were due to an increase in NPLs (see further details at Para 5). The increase in Group total NPLs was due to:-

1. more stringent criteria adopted for classifying NPLs, as advised by MAS. Loans are automatically classified as NPLs once the principal or interest payments is 3 months or more in arrears, in line with practices that have increasingly been adopted internationally. This was stricter than the 6-month criterion used prior to 1998 for automatic NPL classification. In addition, as in the past, all loans to borrowers with weak financials are classified as NPLs, regardless of whether they are in arrears;
2. continuing weaknesses in the regional economies which has also impacted the Singapore economy; and
3. consolidation of NPLs of acquisitions concluded in 1998.

As a measure of prudence, the Group continued to set aside additional special general provisions in 1998 amounting to S$157.8m to meet contingencies which may arise from its regional exposure. This was despite a decline in regional exposure (excluding TDB) of S$2.3b in 1998.

2.8        As a result, Group after-tax profit attributable to members was S$222.7m compared to S$436.4m in 1997. Excluding the contribution from POSBank and losses of TDB, Group after-tax profit would have been S$316.0m.

2.9        The following charts show the 3-year trend of DBS Group’s key financials.

3  REGIONAL EXPOSURE

3.1        Excluding TDB, DBS Group’s exposure, both cross-border and local, to the Regional Countries declined by S$2,255m or 36.7% to S$3,882m, representing 4.2% of Group total assets. Changes in the Group’s exposures over the course of 1998 are set out in Table 3 below.

Table 3 : Regional Countries – Changes in Regional Exposure ^a

^a Exposure excludes loans to and investments in financial subsidiaries and overseas branches.
N.A. Not Applicable

3.2        The DBS Group’s exposure to the Regional Countries as at 31 Dec 1998 amounted to S$9,832m. Approximately 1/3 of the total exposure are sovereign risks and exposure to banks. Details are reflected in Table 4.

Table 4 : Regional Countries – Group Exposure at 31 Dec 98

^aNon-bank loans include loans to governments and quasi-government entities.

4  EXPOSURE TO CHINA AND HONG KONG

4.1        As at 31 Dec 1998, DBS Group’s exposure to China and Hong Kong amounted to S$3,505m, representing 3.5% of Group total assets. Close to 40% of the total exposure are in the form of sovereign risks and exposure to banks. Details are reflected in Table 5.

Table 5 : China and Hong Kong – Group Exposure at 31 Dec 98

^a Non-bank loans include loans to governments and quasi-government entities.

4.2        DBS has no exposure to the Guangdong ITIC (GITIC). Its exposure to defaulting Chinese ITICs amounting to S$14.5m have been adequately provided for. Details of NPLs and provisions made are in Table 5A.

Table 5A : China and Hong Kong – Group NPLs and Provisions at 31 Dec 98

5  NON-PERFORMING LOANS AND PROVISIONS

(A)  Regional NPLs and Provisions

5.1        Regional NPLs increased from S$365.6m to S$1,239.2m (excluding TDB) and S$4,113.5m (including TDB). Unsecured NPLs were fully covered by cumulative provisions made at end-Dec 1998. Details are in Table 6A.

Table 6A : Regional NPLs and Provisions

(B)  Singapore and Others (rest of the world) NPLs and Provisions

5.2        Singapore NPLs increased from S$649.3m to S$2,705.3m in view of the impact of the Asian crisis. Close to 90% (S$2.4b) of the Singapore NPLs are in the substandard category; three quarters (S$1.8b) of these were non-defaulting loans but were nevertheless classified due to assessed weakness in borrowers’ financial strength or loan restructuring. The Singapore NPLs were spread across various industry sectors such as manufacturing, building and construction, commerce, and housing loans, etc. Details are in Table 6B.

Table 6B : NPLs and Provisions – Singapore & Others

(C)  Total NPLs and Provisions

5.3         Total NPLs increased from S$1,112.0m to S$4,211.7m (excluding TDB) and S$7,086.0m (including TDB). Out of the total NPLs of S$7,086.0m:-

• S$4.0b (56%) of the total NPLs (including TDB) were secured by collateral;
• S$2.1b (30%) were non-defaulting but graded substandard; and
• 54% of the NPLs are in the substandard category.

5.4        Total cumulative provisions amounted to 103% of unsecured NPLs.

Details are in the following table.

Table 6C : Total NPLs and Provisions

6  SEGMENTAL ANALYSIS

6.1        A segment analysis of the Group’s total assets, net income and after-tax profit appears in Table 7.

Table 7 : Group Segmental Analysis ^a

^a Geographical analysis is based on the location of the bank, branch or office booking the assets or reporting the results.

6.2       Operations in Singapore accounted for the bulk of Group’s total assets, net income and after-tax profit. The loss in Asean in 1998 was due primarily to TDB.

7  LOAN DISTRIBUTION

7.1        The sector breakdown of the Group’s customer loans is shown in Table 8.

Table 8 : Group Customer Loans By Industry

7.2       Following the acquisition of POSBank, housing loans which are primarily for owner occupation accounted for 25.0% of the Group’s total customer loans as at 31 Dec 1998. DBS is now the dominant mortgage lender in Singapore.

8 MATURITY PROFILE

8.1       Group customer loans and deposits analysed by remaining period of maturity appear in Table 9.

Table 9 : Group Customer Loans and Deposits
(By remaining period to maturity)

8.2        Group customer deposits increased by S$40.3b or 120.1% to S$73.9b due primarily to the acquisitions of POSBank and TDB. POSBank accounted for S$28.1b of the increase mainly in the form of savings deposits. These deposits from more than 3.3 million depositors constitute a diversified and stable source of funds.

9  CAPITAL ADEQUACY RATIO

9.1       The Bank’s capital has been further strengthened by approximately the S$1 billion raised from its recent 1-for-5 Rights Issue. As at end-Dec 1998, total shareholders’ funds stood at S$9.1 billion, a 26.8% increase over end-Dec 1997. The Capital Adequacy Ratio (CAR) of the Group, measured according to the Bank of International Settlements (BIS) guidelines, is as follows:-

Table 10 : Group CAR

9.2        The Group’s total CAR at end 1998 of 15.6% was almost twice the minimum 8% BIS’ requirement. The CAR is actively managed to provide a buffer above the minimum requirement so as to facilitate business expansion, as well as to optimise return on equity.

10  UNREALISED VALUATION SURPLUSES

10.1        As at 31 Dec 1998, unrealised valuation surpluses in DBS Group’s quoted investments and properties, which are not reflected in the balance sheet, amounted to S$1,420m. The Group’s non-financial investments will be actively managed going forward. The chart below shows the trend of the unrealised valuation surpluses over the last 5 years.

11  PROPOSED DIVIDEND

11.1        The Directors have recommended a final dividend of 9%. Together with the interim dividend of 9%, the total dividend rate for 1998 will be 18%, unchanged from 1997. The net dividend payout will however be increased from S$93.5m in 1997 to S$123.4m in 1998 due to an enlarged ordinary share capital following the bonus and rights issues in 1998.

12       Mr John Olds, Vice Chairman and CEO said, "We expect the rate of increase in NPLs and provisions to moderate in 1999. Nevertheless, we continue to proactively manage NPLs and focus on loan restructuring. We remain confident that the regional economies will recover and are positive about the long-term prospects of our new acquisitions." He added, "Looking ahead, we expect therate of increase in NPLs and provisions to moderate in 1999. Nevertheless, we continue to proactively manage NPLs and focus on loan restructuring. We remain confident that the regional economies will recover and are positive about the long-term prospects of our new acquisitions." He added, "Looking ahead, we expect the global financial landscape to be even more competitive. Our domestic franchise has been strengthened by the acquisition of POSBank, providing us with a large retail customer base of more than 3.3 million as well as a stable source of funding for the foreseeable future. Including our new acquisitions in the region, we believe that we are well prepared for the challenges, and positioned for opportunities that lie ahead. All business units have been tasked with the mission of expanding revenues and enhancing returns on equity."