While none of DBS' SGD 2.36 billion of CDOs as at 30 September has defaulted, total allowances of SGD 70 million were set aside for the SGD 275 million of CDOs that had some exposure to US sub-prime assets. This comprised SGD 43 million in specific and general allowances charged to the profit and loss account and SGD 27 million marked against existing cumulative general allowances. In addition, there was a mark-to-market loss of SGD 42 million charged to net trading income relating to CDOs held by Red Orchid Secured Assets (Rosa), a fully-consolidated conduit managed by DBS.
The global market turbulence also affected DBS' structured credit and credit trading activities, which caused negative swings in trading income between the comparative periods.
A separate impairment charge of SGD 38 million was taken for DBS' 16% stake in TMB Bank in Thailand. The charge reflects the further reduction in the market valuation of TMB to SGD 270 million as at 30 September. After inclusion of this impairment charge, net earnings for the third quarter would be SGD 610 million.
Net interest income up 15% as loans expand 23%
Net interest income rose 15% from a year ago and 2% from the previous quarter to SGD 1.05 billion as asset volumes increased. For the nine months, net interest income grew 15% to SGD 3.05 billion
Customer loans grew 6% during the quarter to SGD 104.7 billion, bringing growth to 23% from a year ago. As with recent quarters, the increase was led by corporate and SME loans in Singapore, Hong Kong and the region, while Singapore housing loans picked up further.
Net interest margins fell seven basis points to 2.14% as interest spreads in Hong Kong fell and interest rates in Singapore were lower. Compared to the second quarter, the third quarter reflected the full-period impact of a subordinated debt issue launched in May which also contributed to the margin decline.
Broad-based, 38% rise in fees
Net fee income increased 38% from a year ago and 9% from the previous quarter to a new record of SGD 403 million. Compared to a year ago, this quarter's growth was led by stockbroking, investment banking, loan syndication and wealth management, reflecting continued strength in a broad range of activities. Wealth management product sales rose 15% from a year ago to SGD 1.83 billion, with underlying demand for unit trusts remaining strong during the quarter. For the nine months, net fee income increased 27% to SGD 1.08 billion.
Trading income recorded a net loss of SGD 47 million compared to a net trading income of SGD 100 million in the previous quarter. Wider credit spreads for trading securities and credit-linked derivatives were the main contributors to negative trading income. For the nine months, net trading income from trading businesses amounted to SGD 222 million compared to SGD 464 million a year ago.
Cost-income ratio improves to 42%
Expenses of SGD 652 million were 1% below the previous quarter as staff and other operating costs were actively managed. Compared to a year ago, expenses were 12% higher. The cost-income ratio improved to 42% from 43% in the previous quarter and 44% a year ago.
For the nine months, expenses increased 13% to SGD 1.97 billion as staff and computerisation costs rose. The cost-income ratio improved slightly from 44% a year ago to 43%.
Asset quality improves further
With a continued benign operating environment, the non-performing loan rate improved further to 1.2% from 1.4% in the previous quarter as the amount of non-performing assets fell 5% to SGD 1.43 billion.
Specific allowances for loans fell to SGD 28 million or 11 basis points of loans, which were lower than most recent quarters. Total allowances, including those for CDOs and other non-loan assets, amounted to SGD 80 million. Total cumulative allowances reached 130% of non-performing assets compared to 124% in the previous quarter.
Excluding one-time items, return on equity improved from 12.3% a year ago to 13.0%, while return on assets was unchanged at 1.14%. Return on equity for the nine months increased from 12.4% a year ago to 13.2%, while return on assets improved from 1.14% to 1.20%.
The total capital adequacy ratio of 14.0%, with the tier-1 ratio at 9.2%, compared with 14.7% and 9.4% in the previous quarter.
DBS Vice-Chairman and CEO Jackson Tai said, "Results for the quarter were reassuring despite turbulence in the global credit markets.
"We took steps over the last five years to diversify our earnings across businesses and geography to supplement our strength in corporate banking and the markets. During the quarter, this diversification delivered solid results despite market disruptions on some areas of our Treasury and Markets business. Net interest income and fees rose to new highs as business volumes continued to expand. We produced yet another quarter of higher customer loan volumes, continued cost discipline, and continued improvement in asset quality.
"As I have announced my intention to step down at year-end, I acknowledge with pride the dedication and talent of our staff in building a more-competitive Asia-based bank. I am confident that DBS will continue to deliver value to our customers and growth to our shareholders."
The Board of Directors declared a quarterly dividend of 20 cents per share, similar to the previous quarter. Total dividends for the nine months of 60 cents per share were 18% higher than the same period last year.
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About DBS
Headquartered in Singapore, DBS is one of the largest financial services groups in Asia with operations in 15 markets. The largest bank in Singapore as measured by assets, and a leading bank in Hong Kong, DBS' "AA-" and "Aa1" credit ratings are among the highest in the Asia-Pacific region. DBS has leading positions in corporate, SME and consumer banking, treasury and markets, wealth management, securities brokerage, equity and debt fund raising. Beyond the anchor markets of Singapore and Hong Kong, DBS serves corporate, institutional and retail customers through its operations in China, India, Indonesia, Malaysia, Thailand and The Philippines. More information about DBS Group Holdings and DBS Bank can be obtained from our website www.dbs.com.
