DBS full year 2005 earnings fall 15% to $1.65 billion excluding one-time gains and goodwill charges
Goodwill impairment charge results in loss for fourth quarter
For the full year as well as the fourth quarter, growth in interest and fee income was offset by reduced treasury contributions and higher provision charges.
A one-time $303 million gain from a previously announced sale of office buildings in Singapore and a goodwill impairment charge of $1.13 billion for DBS Hong Kong were booked in the fourth quarter, resulting in a reported full year net profit of $824 million and a fourth quarter loss of $441 million.
Under Singapore Financial Reporting Standards, DBS has to assess the recoverable value of its investments and ascertain whether it is in line with the carrying value of the investments.
DBS Hong Kong's estimated recoverable value was $9.6 billion as at December 31, 2005, compared to a carrying value of $10.8 billion in DBS consolidated balance sheet. The difference between the recoverable and carrying values was taken as a goodwill impairment charge in fourth quarter 2005. The recoverable value of DBS Hong Kong was determined by using a five-year cash flow projection, a long-term growth rate of 4.5% and a discount rate of 9.5%. The goodwill charge has little impact on DBS Groups business operations or prospects as goodwill is deducted from regulatory capital when incurred.
Full year interest and fee income at record high
For the full year, net interest and fee income reached a record as volume growth was sustained in most customer segments. Net interest income surpassed the previous high in 2002 while fee income expanded for a seventh consecutive year.
Net interest income rose 9% to $2.94 billion as loans grew 14% to $79.5 billion, led by loans to corporate and SME customers across the region. Full year interest margins increased from 1.87% in 2004 to 1.91%. The loan-deposit ratio rose to 68% from 62% in December 2004.
Fee income increased 6% to $986 million, with most categories registering growth. Fees from investment banking increased 37% to $134 million as DBS continued to lead in equity and debt market activities in Singapore. Fees from wealth management product sales were up 8% to $129 million, a result of higher margin products being sold despite a decline in product volume from $9.2 billion in 2004 to $7.4 billion. Stockbroking commissions declined 12% to $106 million after a strong performance in the previous year.
The growth in interest and fee income was offset by lower trading income and lower gains from non-trading investments, which fell 65% to $261 million. The lower performance led to a 22% decline in total non-interest income to $1.4 billion for 2005 before one-time gains.
Operating expenses rose 4% to $2.02 billion. Staff costs increased 6% to $1.05 billion on an 11% increase in headcount to 12,728. Pressures on staff costs continued throughout 2005. The cost-income ratio (excluding one-time gains) for the full year increased to 47% from 44% in 2004, the result of a decline in non-interest income and higher expenses.
Fourth quarter operating performance improves as interest and fee income grow
In the fourth quarter, operating income and operating profit before provisions were higher than the previous quarter and a year ago despite lower trading income.
Net interest income grew 7% from the previous quarter and 20% from a year ago to $800 million. Net interest margins increased to 2.06% compared to 1.92% in the previous quarter and 1.83% in fourth quarter 2004. Yields on corporate, SME and mortgage loans in Singapore rose while spreads between prime and borrowing rates in Hong Kong, and spreads on Singapore deposit rates continued to improve. Loans grew 1% during the quarter.
Fee income of $241 million was stable compared to the previous quarter and 3% higher than a year ago. Against fourth quarter 2004, fees from investment banking, wealth management product sales and asset management recorded double-digit percentage growth. These increases were partially offset by declines in loan-related fees and stockbroking commissions.
Net trading income from trading businesses was $44 million for fourth quarter 2005. It was 4% lower compared to the previous quarter and 54% lower than a year ago as revenues from trading and customer-related activities remain constrained.
Operating expenses rose 6% from a year ago to $551 million. Staff costs increased 9% to $279 million as market pressures for people drove up costs. The fourth quarter's cost-income ratio (excluding one-time gains) of 49% was slightly below the 50% a year ago.
Asset quality remains good
DBS' asset quality remained strong. The non-performing loan rate was 2.1% compared to 2.0% in September 2005 and 2.5% a year ago. Non-performing assets (including debt securities and contingent liabilities) of $1.87 billion were 3% higher from the previous quarter but 3% below a year ago.
The amount of total provisions set aside for the full year rose to $203 million from $63 million in 2004 as write-backs for loans and properties fell. Fourth quarter total provision charge increased to $55 million compared to a $4 million charge in the previous quarter and a net write-back of $30 million in fourth quarter 2004. Cumulative general and specific provisions amounted to 97% of non-perfoming assets in December 2005, unchanged from the previous quarter and higher than the 89% a year ago.
The total capital adequacy ratio stood at 14.8%, with the tier-1 ratio at 10.6%, both comfortably above minimum regulatory requirements.
DBS Vice-Chairman and CEO Jackson Tai said, "Although our overall results were adversely affected by difficult markets, we recorded strong growth in our loan book, and produced record interest income and fee income. Our margins are better and we maintained asset quality. We will continue to invest in a resurgent Asia, but will balance our growth with a stronger focus on productivity."
The Board of Directors will recommend, for shareholders' approval at the March 30, 2006 Annual General Meeting, a fourth quarter dividend of 17 cents per share, bringing the full year payout to 58 cents per share. This is a 45% increase over the 40 cents per share paid out for 2004.
Headquartered in Singapore, DBS is one of the largest financial services groups in Asia with almost five million customers and operations in 14 markets. The largest bank in Singapore and the fifth largest banking group in Hong Kong as measured by assets, DBS' "AA-" and "Aa2" credit ratings are among the highest in the Asia-Pacific region. DBS has leading positions in consumer banking, treasury and markets, asset 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