DBS first half 2003 net profit down 13.1% to S$466 million; operating profit up 3.1%

Singapore.01 Aug 2003

Dbs diversifies from traditional lending; non-interest income up 26.1%, contributes 43% of total income


Singapore, 01 Aug 2003 - DBS Group Holdings (DBS) today announced first half 2003 net profit decline of 13.1% to S$466 million from S$536 million reported last year. Operating profit grew 3.1% to S$1.142 billion over the same period last year.

Financial Highlights
1H 2003 versus 1H 20022Q 2003 versus 1Q 2003
·  Net profit down 13.1% to S$466 million·  Net profit decreased 33% to S$187 million
·  Cash* net profit increased 1.2% to S$680 million·  Cash* net profit decreased 23.8% to S$294 million
* * ** * *
·  Operating profit before goodwill amortisation and provisions up 3.1% to S$1.142 billion·  Operating profit before goodwill amortisation and provisions down 13.7% to S$529 million
·  Provision charges up 41.4% to S$287 million·  Provision charges increased 49.6% to S$172 million
·  Non-performing loan (NPL) ratio stable at 5.9%·  NPL ratio steady at 5.9%
·  Cash* ROA down to 0.88% from 0.89%·  Cash* ROA down to 0.75% from 1.01%
·  Cash* ROE down to 9.3% from 9.7%·  Cash* ROE down to 8.0% from 10.6%
·  Return on tangible equity (ROTE) up to 19.4%·  ROTE down to 16.3%
·  Annualised Basic EPS* stable at S$0.91·  Annualised Basic EPS* down to S$0.78

* Excluding goodwill amortisation First half resultsFor first half 2003, DBS reported net profit attributable to members was down 13.1% to S$466 million. Excluding goodwill amortisation, net profit attributable to members was up 1.2% from the previous year to S$680 million. Operating profit before goodwill amortisation and provisions for the first six months to June 30, 2003 improved 3.1% from the same period in 2002, boosted by a 26.1% rise in non-interest income, but held back by a 13.1% decline in net interest income. Operating expenses fell 2.7%.

Despite the growth in operating profit, higher provisions and goodwill charges hurt the bottom line. Commenting on the results, DBS CEO Jackson Tai said, "Our dominant Singapore deposit base, which can be a strategic advantage, was difficult to manage in today's low rate environment. Moreover, intense competition continued to squeeze interest margins on our mortgages, and we set aside higher provisions in view of the turbulent environment. "DBS Hong Kong operations showed resilience despite a difficult environment. Interest margins in Hong Kong remained stable and continued to be higher than the levels in Singapore. Our Hong Kong franchise has significantly enhanced the group's distribution capability for DBS' corporate finance, treasury, and wealth management products."Second quarter results

Operating profit before goodwill amortisation and provisions for the second quarter was S$529 million, down 13.7% compared to the first quarter of 2003. For the same period, net interest income and non-interest income dropped 6.5% and 6.1%, respectively while provisions rose 49.6%. Operating expenses were marginally higher by 3.8%. Net profit attributable to members was down 33% to S$187 million relative to the first quarter of 2003. Excluding goodwill amortisation, net profit attributable to members for the quarter decreased 23.8% to S$294 million.

Operating income Operating income for the first half of 2003 was up slightly to S$2.043 billion - a 26.1% increase in non-interest income to S$884 million more than offset a 13.1% decline in net interest income to S$1.159 billion. DBS' distribution power through its branch network in Hong Kong and Singapore coupled with its strong capability in originating investment products, generated record investment product sales. The Bank was able to transfer product structuring capabilities to its Hong Kong banking franchise, and customised a range of interest rate, foreign currency and other derivative products to meet growing customer demand for higher-yielding instruments in an otherwise low-interest rate environment.Sales of investment products in Singapore and Hong Kong totalled S$4 billion in first half 2003, almost double the S$2.1 billion achieved in first half 2002. Branches in Hong Kong reported S$2.1 billion in sales, or 1.5 times the whole of last year, while Singapore accounted for S$1.9 billion. Quarter on quarter, investment product sales grew 13% despite the outbreak of the pneumonia virus in the region.

Net interest margin dropped 19 basis points to 1.78%. The decline was driven by rate competition in key lending segments such as home mortgages, as well as from lower returns in the interbank market for DBS' excess funds. Compared to first half 2002, the average yield on customer loans fell 57 basis points and the average yield on interbank assets declined 86 basis points. As DBS is a leader in home mortgages and deposits, these two sharp declines adversely affected the Group's interest margins. However, steps taken to reduce funding costs by 46 basis points partially offset declines in loan yields. Consequently, net interest income decreased 6.5% for the second quarter compared to the first quarter of 2003. Net interest margin for the second quarter was 1.68%. In the first half of 2003, DBS achieved loan growth of 3.3% over December 31, 2002. The ratio of non-interest income to total income stood at 43.3%. Other income surged 76.3% to S$469 million on the back of strong sales in structured products and gains from trading government and corporate securities. Fee and commission income for the first half was down 7.9% to S$374 million as weaker equity markets in the region dampened stockbroking income. Although DBS achieved substantial volume gains in investment product sales, not all earnings from these efforts are recorded as fee income. A significant amount of DBS' wealth management products incorporate the Bank's own Treasury structured products and therefore, revenues from these structured products are recorded in "Other Income" category.

For the quarter, non-interest income decreased 6.1% to S$428 million. Fee income increased 33.8% to S$214 million and other income declined 34.3% to S$186 million. Fee income was supported by higher income from stockbroking, wealth management and investment banking operations.DBS led the Singapore markets in IPOs, share placements, loan syndications and M&A advisory deals in first half 2003, including the flotation of SingPost, the largest new issue in Singapore this year. In the same period, the Bank was ranked first in the number of merger and acquisition deals completed in Asia ex-Japan, and fifth in value terms, by Thomson Financial. Operating expensesOperating expenses were down 2.7% to S$901 million compared to first half of 2002, as DBS continued to prudently manage its operating cost structure. Consequently, DBS' cost-to-income ratio fell 1.4 percentage points to 44.1%.

The improvement in expenses was primarily due to a 7.9% reduction in staff costs to S$429 million. Of the S$37 million staff cost reduction, approximately S$21 million was due to lower headcount resulting from the outsourcing of technology-related functions in the Group, and the balance from rationalisation of workflow and businesses. The outsourcing costs, recorded under technology-related expenses, accounted for the bulk of the 38.5% increase in that category.For the second quarter, expenses were up 3.8% compared to the first quarter of 2003 due to revenue-related commissions and other charges arising from stronger brokerage and investment fund sales. For first half 2003, DBS Hong Kong reported net profit growth of 12.2% (proforma for the combined operations of DBS Kwong On and Dao Heng Bank, under Hong Kong accounting standards) over first half 2002, despite a 71% increase in provisions. Operating profit before provisions increased 27.1% as the group achieved higher income through the strong distribution of investment products and better cost efficiency. The operating results were supported by increase in non-interest income of 30.5% to S$171 million while net interest income declined 4.1% to S$402 million. Net interest margin in Hong Kong remained stable at 2.35%. Operating expenses decreased 2.4% to S$242 million and cost-to-income ratio improved to 42.2%. The cost efficiencies reflected the Group's rationalisation of its Hong Kong branch network by 30% since December 2000, and the integration of processes within Hong Kong and across the region. Asset quality DBS' total non-performing loans (NPLs) at June 30, 2003 were S$4.163 billion or 5.9% of total non-bank loans, compared to S$4.224 billion or 6.1% of total non-bank loans at the end of December 2002. The overall grading of the NPLs remained stable - 73% were graded substandard and only 27% were graded doubtful or loss.

DBS' Hong Kong credit card annualised charge-off rate for first half of 2003 was 12%, 0.2 percentage points higher than the 11.8% full year charge-off rate for 2002. DBS maintained a cautious approach to provisioning due to the continued sluggish economy. For the first half of 2003, provisions totalled S$287 million, up 41.4% from S$203 million in the first half of 2002. Of the specific provisions, S$172 million was related to loans, S$7 million to equities and S$81 million to properties and other assets. DBS Thai Danu BankAs reported on July 18, 2003, net profit at DBS Thai Danu Bank (DTDB) grew 40.8% to Baht 184.3 million (S$7.7 million) for first half 2003 compared to the corresponding period in 2002.

DTDB achieved 6% growth in net interest and dividend income to Baht 1,209.3 million (S$50.5 million) and non-interest income growth of 11.6% to Baht 465 million (S$19.4 million). The net interest income growth was aided by a 2.7% year-to-date loan growth to Baht 79.6 billion (S$3.3 billion). Operating expenses were up 4.9% to Baht 1,140 million (S$47.7 million) primarily due to technology related investments to enhance service quality, higher business taxes and Financial Institutions Development Fund contributions. Capital and DividendsAt its meeting today, the DBS Board approved maintaining first-half dividend of S$0.14 per share, payable on August 28, 2003 to shareholders on record on August 15, 2003. At June 30, 2003, DBS' total capital adequacy ratio (CAR) stood at 14.2%, comfortably above the minimum 8% total CAR under BIS standards.

DBS' Tier 1 CAR was 9.7%. The Group has no present plans to raise additional capital. DBS Bank is the largest bank in Singapore as measured by assets, with dominant positions in consumer banking, treasury and markets, securities brokerage, and equity and debt fund raising. With the merger of its wholly-owned Dao Heng Bank and DBS Kwong On Bank operations in Hong Kong, DBS Bank is now the fourth largest banking group in Hong Kong. Beyond the anchor markets of Singapore and Hong Kong, DBS Bank serves corporate, institutional and retail customers through its operations in Thailand, The Philippines, and Indonesia. In China, the bank has branches and representative offices in Shanghai, Beijing, Shenzhen, Fuzhou and Tianjin. The Bank's credit ratings are amongst the highest in the Asia-Pacific region. More information about DBS Group Holdings and DBS Bank can be obtained from our website www.dbs.com.More information on the above announcement is available at www.dbs.com/investor.The presentation for Media and Analysts will be webcast from 1730 hours (Singapore and HongKong time)