| 2001 was a challenging year for DBS as we continued to invest in our people, products and infrastructure amidst a difficult economic environment. Revenue - a requirement to building a successful franchise - was a record S$3.5 billion, up 21% from 2000 due to partial year consolidation of Dao Heng Bank. Fee income - a key metric for new business growth - was up 26%. Operating profit, before goodwill charges, rose 7%. Net income however declined 28% to S$999 million, as we prudently raised provisioning to S$379 million and took a goodwill charge of S$131 million for our acquisitions of Dao Heng Bank and Vickers Ballas. Cash return on equity was 10.1%. GAAP return on equity was 8.9%, below our target of 15%. We believe that the fundamentals to improve the long-term profitability of the Bank are in place. However, near-term return on equity performance will be affected by the weak economy and the current mismatch between the investment cycle and expected returns. For 2001, DBS maintained the dividend rate at 30%. Capital adequacy, as measured under Bank for International Settlements regulations, was a strong 17.4% (12.2% Tier I) at end 2001. Numbers do not tell the whole story. Changes throughout the organisation bring us further in our journey towards a customerfocused pan-Asian financial services organisation.
OUR VISION IS TO BE THE BEST BANK IN ASIA
Our progress last year was characterised by strategic transformations in infrastructure, products, services and geographies. The defining transactions were our acquisitions of Dao Heng Bank, which established us as a Hong Kong banking and credit card leader, and Vickers Ballas, which broadened and deepened our regional reach in the securities business. In addition, we secured alliances with CGNU and TD Waterhouse, adding new capabilities to our product propositions in insurance and self-directed brokerage, respectively. We continue to enhance processing and servicing efficiency. Revenue streams are broadening, bringing us more in line with well-diversified and growing financial services providers. We saw record growth in credit cards, insurance and other wealth management products last year, complementing our leading market position in mortgages. We substantially restructured our balance sheet in 2001. We raised new capital via several innovative issues to fund our acquisitions. We raised S$1.4 billion in Hybrid Tier I preferred shares, S$1.6 billion in subordinated debt, S$1.1 billion in preferred shares and S$2.2 billion in new common equity. We have improved our financial leverage and moved towards a more optimal capital structure.
 A YEAR OF TRANSFORMATION
Business Operations
Our investments in people and infrastructure are beginning to bear fruit. This is exemplified by our treasury and markets business where our modern treasury centre, put in place in late 2000, and the enhancement of talent, from front to back office, from market-making to offering risk management solutions to our customers, resulted in a strong financial performance and regional market leadership. Our dominance of the capital markets in Singapore continued last year, with top rankings in Singapore Dollar bond origination and domestic new equity issuance. We led major transactions in the Singapore Dollar S$1 billion inaugural bond issue and Land Transport Authoritys S$500 million bond issue, the first bond issue with the longest tenor of 15 years. Difficult market conditions brought multiple impacts on our corporate lending business. Loan demand was slow and margins were squeezed. We raised provisions in a prudent response to the economic uncertainty and falling asset values. Our significant investments in credit risk management systems and processes have proven to be timely in enhancing our ability to monitor and improve non-performing loans (NPLs) despite setbacks in the regional credit environment. As a result, DBS has been able to reduce its NPLs throughout the year from 7.6%, as of December 2000, to 6.2% in June 2001 and to 5.7% in December 2001. We have unearthed opportunities, amidst the economic challenges, to strengthen our relationship with our customers. Last year, we developed a suite of products and services to help our Small & Medium-sized Enterprise (SME) customers navigate the difficult economic environment. This was a result of our approach to customise solutions to suit the requirements of customers in each segment, from start-ups to winners of the Enterprise 50 Awards and publicly-listed companies. We also respond more effectively to the SME business community through our new Business Centres which are strategically located near our customers. Our consumer banking business has also been transformed. Results are beginning to show up in new revenue streams, particularly in credit cards and wealth management businesses, generating higher fee income. In Singapore, we increased our credit card base by 25% and outstanding receivables by 30%, taking us up to second place in the market. Total credit card fee income grew 147% to S$82 million in 2001 through our Dao Heng acquisition and through organic growth. Our wealth management business grew at a record pace last year. Sales of investment products rose 76% and that of insurance products, 56%. New Revenue Streams Through Alliances
In 2001, we completed two further strategic partnerships that will bring new revenue streams in promising business areas and add to our future growth. We struck an alliance with world-class online brokerage service provider TD Waterhouse, that provides highly competitive self-directed trading services with global coverage of securities markets. Following the sale of our insurance company, The Insurance Corporation of Singapore Ltd, we entered into a partnership with CGNU, the largest insurer in the UK, to bring best-inclass bancassurance products to our customers. These follow our earlier successful alliance with Frank Russell in the development of the leading ei8ht?and Horizon?investment programmes. Thus, while traditional sources of income such as interest income from mortgages and other loans remain important, we are diversifying and balancing out our portfolio with new revenue streams. Maturing and Widening Distribution Capabilities
We have reorganised and developed our delivery channels around clear customer segments, recognising their specific needs. This is illustrated by the revitalised POSB brand, our model branches for both DBS and POSB, and the introduction of supermarket banking with NTUC FairPrice. We opened our second call centre in Singapore, a 300-seat facility, and in Hong Kong, we integrated our call centres for greater efficiency. These centres are equipped with Customer Relationship Management (CRM) capabilities. Internet banking services have continued to grow. Our online customers increased by 51% last year. More than 320,000 users generated almost S$6 billion of online financial transactions last year.
IMPROVING THE GEOGRAPHICAL BALANCE
A year ago we were predominantly a local bank with more than 80% of our assets and net income concentrated in Singapore. At the end of 2001, only 60% of our assets were Singapore-based. With the purchase of Dao Heng Bank in Hong Kong, we have become the fourth largest banking group and the third largest credit card issuer in Hong Kong. We are now better positioned to expand into North East Asia and develop a platform for future business opportunities in China. We strengthened our regional presence in the securities business in September 2001 with the purchase of Vickers Ballas, a securities company with operations in Hong Kong, Thailand, Singapore and other global locations. DBS Vickers Securities, the newly integrated entity, will play a central role in the development of our wealth management business. DBS Thai Danu Bank, our banking unit in Thailand, has made steady progress since its acquisition by DBS in 1998, attaining a turnaround to full-year profitability in 2001. Our experience in rationalising operations - of DBS Thai Danu Bank in Thailand and POSB in Singapore - is proving invaluable as we integrate Dao Heng Bank and Vickers Ballas into DBS. The ability to integrate effectively and efficiently will be key to a successful expansion of the Bank's Asian franchise.
STRATEGIC INVESTMENTS
Technology and Processes
Our technology and processes provide us with the business and customer intelligence necessary to execute efficiently and to balance risk and reward. In 2001, we reaped the first full year of benefits of our investments in a modern treasury centre and in the technologies supporting trading and market risk monitoring. These systems, together with a rigorous risk review and sign-off process, enabled us to offer new derivatives products and provide effective financial solutions to our customers. Customer intelligence was greatly enhanced last year with our firm-wide CRM platform and the new call centre. This new customer intelligence capability has already generated over one hundred targeted marketing campaigns. We are investing in new technologies and re-engineering processes to deliver a superior capability to our customers. In consumer credit management, we centralised our approach to managing credit quality and collections, used credit scoring and quantitative methods extensively, and implemented an automated collections system, thus creating greater objectivity, efficiency and capacity in managing asset quality. New credit risk processes were also put in place for corporate loans, and the management of problem loans has been centralised with the formation of a Special Asset Management Team. We place a similar emphasis on the systems and processes needed to develop robust structures in other risk and corporate governance areas, such as business continuity planning and audit. To underpin the Banks Asian franchise, we are developing an operating platform known as Asia 21. The model provides a modern, robust and scalable platform for all areas across the region, from credit, human resources, finance to operations. It will streamline our business operations, increase our efficiencies and contain our costs. People
Asia is a collection of diverse markets, each made up of communities that are not homogeneous. Banks like DBS must behave like modern consumer companies in order to effectively serve our constituents well and prosper alongside them. Hence, we embrace diversity to understand and successfully meet our customers?needs. It is vital for us to know each of our customers as an individual. Our success as a bank depends on our ability to delight our customers, so we maintain a resolute focus on customer intimacy. Technological developments and database mining make the process of getting to know the customer much easier, but we are still a people business ?it is people who assess the data and use it creatively, and it is people who take risks and dare to be different. The challenges of new ideas, energies and vigorous debate generate new fields of inquiry, stimulate discussion about accepted ideas and standards, shift paradigms and improve professional practices. A diversity of talents, perspectives and experiences is essential to intellectual strength. While we understand that managing this diversity will be an ongoing issue, we believe it is critical to the Banks future success. Community
We commend our staff for their efforts in serving the communities in which the Bank operates. The DBS Volunteers Programme, introduced in July 2000, granted each employee in Singapore two days of volunteer leave to perform community service. It has proven to be a tremendous success, with one of the highest corporate participation rates here. In line with our business philosophy, our sponsorship and philanthropy initiatives focus on enabling the communities in which we work to reach their goals. These include funding the Arts ?both through bringing world-class performances to the region and encouraging the development of local talent ?to philanthropic activities revolving around the School Pocket Money Fund, the Vocational Training for the Autistic Association and the Riding for the Disabled Association.
ACKNOWLEDGEMENTS
We want to thank our team members at all levels of the Group for their passion and dedication in building the foundation for our future growth. We also take this opportunity to welcome our new colleagues from Dao Heng Bank and Vickers Ballas into the DBS family. We would also like to express our deep appreciation to our Directors for their continuing guidance. Special mention must be made of Alan Chan who served as a Director from April 1, 1996 to April 1, 2001. We thank him for his advice and contributions to the Board. Most importantly, we thank our customers, business partners and you our shareholders for your continued and invaluable support.
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