DBS Group Holdings' performance improved significantly in 1999. Operating profit was up 75 percent to S$1.96 billion, resulting in an increase in net profit of 857 percent to S$1.07 billion.

The growth was attributable to a number of factors. Acquisitions of POSBank in Singapore and Kwong On Bank (KOB) in Hong Kong each contributed to total operating profit, as did increases in net interest income, proprietary trading and income from stockbroking and investment banking, all of which were up significantly over 1998. Exceptional profit from divestment of a stake in Singapore Petroleum Company and the securitisation and sale of DBS Tampines Centre contributed a total of S$175 million.

The improvement came against the backdrop of recovering Asian economies. Clearly, we benefited from more favourable economic conditions. But a good part of the increase in operating profit was of our own making. Efforts over the past 18 months to change our focus, practices and processes, and our culture are beginning to have an impact.

The Asian crisis affected many countries in significant ways, and recovery has been uneven. As a result, total Group non-performing loans (NPLs) increased by 15 percent during the year. This was largely due to the consolidation of NPLs upon acquisition of KOB in Hong Kong, as well as the need to further provide for NPLs at DBS Thai Danu Bank (DTDB) in Thailand.

Given earlier actions, additional provisioning at DTDB was disappointing. But we are encouraged by an improving economic situation in Thailand and the active restructuring of portfolio NPLs underway by Bank staff. Compared to 1998, DTDB's NPLs have been reduced by approximately 33 percent (based on Bank of Thailand guidelines), to Baht 42.2 billion, which is equivalent to 41 percent of total loans. A great deal of time and effort has been spent evaluating the DTDB portfolio, and we now have a fuller understanding of the depth of the impaired loans. We remain cautious due to the scope of restructuring underway in the Thai banking sector as well as the cautious implementation of legislative and regulatory changes. Accordingly, our conservative approach to the classification of NPLs led us to increase loan-loss provisions at year-end to 60 percent. We have endeavoured to do everything within our control to insulate DBS Group Holdings' shareholders from the problems and, barring unforeseen circumstances, provisioning should abate in Thailand in 2000.

As the Asian economic crisis unfolded, misunderstandings as to how institutions such as DBS account for and manage non-performing loans have become evident. We have therefore developed, with the assistance of PricewaterhouseCoopers, a primer on 'Bank Reserve Accounting' as a special pullout section to this report. We encourage you to review it to better understand the issues surrounding provisioning and its impact on DBS' financial statements.

The Road Taken
Last year, we outlined the Bank's plans to evolve into a regional world-class bank. Put simply, we intend to extend our footprint throughout the developed markets of Asia, with Hong Kong and ASEAN the focal point of that strategy in the near term. By doing so, we will expand our market presence, maximise opportunities in those aspects of our business where we have gained competitive advantage in our home market, and build sustainable value for shareholders. The journey progressed, with many significant achievements in 1999.

After the merger with POSBank in 1998, we continued with selective regional acquisitions last year. Singapore remains the springboard, but the acquisitions give us a start towards diversifying our revenue base. Each step taken has brought us closer to our regional bank objective.

During the course of the year, we focused on improving systems, processes and practices at home, and then applying them throughout the DBS network abroad. Aggressive actions to strengthen risk management tools, particularly credit processes, were a significant part of this effort. Other initiatives involved upgrading the Bank's electronic distribution platform and, through enhanced training, improving human resource practices and organisational efficiency at every level.

In 1999, DBS Group Holdings' return on equity (ROE) rose to 10.35 percent (versus 1.29 percent in 1998), which is equivalent to levels attained before the Asian economic crisis. Our goal remains to lift ROE to the mid-teens by the end of 2001.

International confidence in the Bank's prospects also increased. In July 1999, DBS Bank was awarded long-term credit ratings by the world's three rating agencies, the first bank in Singapore to receive an official credit rating and thus join a select group of global financial institutions.

In September, DBS Bank became a wholly-owned subsidiary of DBS Group Holdings Ltd., a financial services holding company, which will provide central planning, fund raising, capital allocation and other management services. The new structure will provide greater flexibility to combine business functions and focus central resources of the group as we expand across the region. In time, it will also provide a common regional platform for DBS to distribute diversified financial products, form strategic alliances and better manage customer relationships. Certain non-core assets will be sold to allow DBS to focus on its core banking businesses. In this connection DBS agreed to sell 82 percent of its 30.27 percent ownership in DBS Land on February 21, 2000.

Capital Management
In 1999, the Group's capital adequacy ratio increased to 19.2 percent, more than twice the minimum required by Bank for International Settlements (BIS) and considerably in excess of (the more stringent) 12 percent minimum of the Monetary Authority of Singapore (MAS). At December 31, 1999 total Tier 1 capital stood at S$10.5 billion, up from the S$9.6 billion at year-end 1998, and Tier 2 capital rose to S$2.4 billion from S$0.8 billion a year earlier.

Following the MAS' liberalisation of bank capital structures in late 1998, in August 1999 DBS Bank launched an issue of US$750 million 10-year 7.875% subordinated notes which qualify as Tier 2 capital. The notes received ratings of A1 by Moody's, A- from Standard & Poor's and A+ by Fitch IBCA, resulting in strong demand from institutional investors globally. This has carried through in secondary market trading activity, helping the Bank create a benchmark for future issues. A subsequent US$500 million issue of global subordinated debt was sold to international investors in April 2000.

During the year, a recapitalisation exercise was successfully carried out for DTDB through a rights issue and two further issuances of convertible preference shares which raised DTDB's proforma total capital ratio from 9.2 percent to 19 percent.

In response to further liberalisation of the financial sector in Singapore, DBS' shareholders agreed to lift the 40 percent foreign shareholding limit and allow the Bank to merge its local and foreign ordinary shares from September 3, 1999 onwards. The share merger promotes a more uniform and identifiable value for DBS shares. We also expect it will help expand the Bank's investor base, improve trading liquidity and provide additional strategic and capital raising flexibility. Shareholders also approved the formation of a Nominating Committee to focus on Board and key executive appointments. Together with the Compensation Committee, the Nominating Committee will look at succession issues.

In November, DBS shareholders approved a share buyback mandate. This action permits DBS to purchase ordinary shares of DBS Group Holdings of up to 10 percent of total issued ordinary shares, and provides further flexibility in managing capital and improving shareholders' returns.

Regional Strength
In Singapore, DBS made significant strides toward the full integration of POSBank and in building the dominant retail distribution network in the country. Regionally, we expanded through selective acquisitions during the year. The addition of KOB extends our reach to corporate and individual banking customers in Hong Kong. The acquisition was concluded in July 1999 resulting in an effective ownership stake of 87 percent.

We identified The Philippines as a growth market some time ago. In 1999 we took steps to acquire a significant stake in the Bank of the Philippine Islands (BPI), the country's most profitable financial institution which is in the process of merging with Far East Bank and Trust Company in 2000 to form the largest bank in the country. Once the merger is completed, DBS will own 19.7 percent of the combined entity, creating an alliance that serves a growing base of customers. In the past, our stated policy has been to acquire majority stakes to extend DBS' brand and establish integrated banking operations in the region. But the scope and speed of consolidation in The Philippines persuaded us that holding a significant stake in a bank as influential, profitable and well-managed as BPI represented a greater opportunity than if we were to continue to invest significant amounts of capital and management attention to grow a small bank to a position of significance.

With each new acquisition, work begins immediately on integration and sharing of systems, processes and practices. The Regional Integration Centre (RIC), established during the year, is intended to accelerate this process. The RIC will extend the regional operating model and transplant best practices, even as the transformation of our core business in Singapore continues to change. Senior DBS executives lead the Centre from Bangkok, assisted by other regional business heads who commit time to the integration effort. The goal is to create a seamless, unified and customer-focused organisation in Asia, able to take advantage of economies of scale and deliver affordable, value-added services.

Organisational Effectiveness
A top priority is achieving organisational efficiency. In recent years, we have undertaken many strategic initiatives to align our processes and systems with the best international practices. These centre on building essential technology infrastructure, re-engineering internal processes and re-energising employees to attain the competitive efficiencies necessary to sustain growth and high returns.

Cross-selling and cross-functional decision making remain key planks of our strategy. Above all, these require building effective teams. Strong, cross-functional teams are critical to expanding market presence, increasing brand recognition and product penetration and creating responsive customer services. Market conditions and advances in technology have resulted in unprecedented complexity and specialisation, but our people have shown great resilience in pulling together to achieve competitive advantages crucial for future success.

Customer-Focused Innovation
The speed at which technology is advancing and converging in Asia rivals that of any other region in the world. Internet services today permeate all levels of society, crossing all geographical and demographic borders. We view these developments as an opportunity, not a threat, and we are investing heavily in training and infrastructure to capitalise on this unprecedented period in human development.

One of the great benefits of technology is its ability to capture and analyse market and customer data rapidly. Extensive data mining is re-defining the way we operate and deliver products and anticipate opportunities with our customers. In time, we expect our growing regional network to create the critical mass necessary to take advantage of core processing systems and data mining efforts. Coupled with re-training and re-deployment of staff, we expect to put data to even more effective use. Internet technologies and the declining cost of telecommunications are rapidly extending the reach of all financial institutions, including DBS. These give us the ability to harness a wider range of product and service channels and move us closer to customers' unique requirements. Case in point: DBS' Internet Kiosks for the first time made available in Singapore a host of convenient and secure banking services for customers using ATM cards. We also transformed DBS' website in 1999 to incorporate a variety of new services and information with customer-friendly features.

During the course of 1999, we entered into several strategic alliances to leverage the delivery of new and innovative products to DBS customers. With The Frank Russell Company, one of the world's pre-eminent fund managers, we launched the Horizon Investment Programme in July 1999. This is the first in a broader range of individual investment and financial planning products which serve as alternatives to traditional savings vehicles. In October, DBS Card Centre joined forces with American Express to introduce the DBS Amex card, the first time that American Express has co-marketed one of its card products in Asia. Another strategic partnership with ibex.com Pte Ltd has led to the formation of a complete business-to-business e-commerce solution for corporate customers. And DBS also teamed with Singapore Telecom to introduce a suite of electronic banking services accessible from SingTel mobile phones.

The Road Ahead
To sum up, there are encouraging signs that the regional economies are well on the road to recovery. But the operating environment will continue to be both competitive and unpredictable. The global forces for consolidation sweeping across banking and financial services and the Internet are opening our marketplace to new competitors even as a liberalised Singapore banking market opens it to conventional ones.

S Dhanabalan Chairman
John T. Olds Vice Chairman and CEO
Ng Kee Choe President and COO

DBS plans to maintain the momentum it has established. We expect to continue to consolidate our leadership position in Singapore by building on core banking products, and focusing more significantly on high-growth products, high margin corporate and individual banking segments. Expansion in the region will also continue selectively, and new acquisitions will be integrated as rapidly as possible within the Group so we can present one face to the market.

Risk management policies and internal processes will continue to be strengthened. We want to better manage the risks inherent in a rapidly changing financial services industry and to improve returns on shareholders' capital. Underlying the business strategy are plans to invest even more aggressively in information technology and training to sharpen the Group's competitive edge.

The Asian economic crisis, difficult as it was, has created opportunities. Strong institutions such as DBS, able to re-group, plan for the future and move forward, benefit from increased competition even as other institutions struggle to survive. We enter the new millennium in a strong financial condition, with ambitious plans, and the ability to execute an opportunistic expansion strategy. With favourable market conditions expected to continue in Singapore and an improving picture in the region, we remain intent on building the DBS franchise and further improving performance in the coming year.