DBS operating revenues grow 2.7% despite weak economic conditions

Singapore.23 Jul 2001

Net profit declines 10.6% to s$629 million as investments in staff and infrastructure result in higher costs


Singapore, 23 Jul 2001 - DBS Group Holdings (DBSH) today reported that operating income for the first half of 2001 increased by 2.7% to S$1.5 billion. This increase, however, was offset by higher costs related to building up its franchise. As a result, net income fell to S$629 million in the first half of 2001, a 10.6% decline from the first half of 2000. The increase in operating income was due, in part, to the strength of DBS' non-interest income businesses such as Treasury and Markets, fund management, trade finance and investment banking.

The growth in non-interest income reflects DBS' strategy of diversifying its business away from that of a traditional bank to a fully-integrated domestic and regional financial services provider.

 

DBS management said that the higher operating costs reflected the Group's investments in enhancing its IT infrastructure, staff and network capabilities to take advantage of future growth opportunities. Staff costs rose by 38.5% to S$389 million, of which S$42 million was attributed to one-time contractual payments, staff adjustments and sign-on bonuses. The balance of the increase in staff expenditures was principally due to recruitment of additional staff, salary increments including allowances, and higher variable bonuses. In addition, higher technology-related and advertising expenses were incurred for various business initiatives.

DBS management also said that the first half 2001 results were largely consistent with the operating performance of the Group in the second half of 2000, when the impact of the increasingly competitive environment and weaker macroeconomic conditions first became apparent. For example, key line items such as interest income, fee income and operating income are in line with the second half of 2000.

Return on assets declined from last year's 1.31% to 1.08%. Return on equity fell from 13.13% in the first half of 2000 to 11.36%.

Results strong in light of weak global economic conditions

S. Dhanabalan, Chairman of DBS, said: "Beginning last year, global economic trends began to soften and economic activity world-wide continues to slow. Given the down turn in growth in the United States and Europe, the picture for Asia remains uncertain.

"Singapore is not immune to global economic trends. The statistics show we may be in a recession and our export figures are down. So it is not surprising that the banking and financial services industries, both here and regionally, are facing challenges.

"The economic uncertainties have had an impact on the Bank's results and activities in the first half of the year. We have been well aware of the difficult conditions and have worked hard to invest in our businesses to improve our services to our customers. So, although our underlying operations have held up fairly well, our costs have increased as we continued to invest in staff, IT and other capabilities. Nevertheless, we must focus on moderating cost and creating efficiencies."

CEO Assessment

"The mixed results of the first half of this year reflect the economic conditions as well as a Bank in transition. We are also continuing building a true Asian Franchise."

Philippe Paillart, CEO of DBS, said: "The mixed results are due to flat revenue growth, a fall in interest income resulting from tighter margins and lower volumes but with an increase in non-interest income. Total operating expenses increased by 26.1% mainly due to increases in staff and technology expenses as DBS continues to build its management teams and operating platforms throughout Asia. We are also marketing an increasingly broad range of products and services.

"The results also reflect a bank in transition - more customer focused, spending more resources on service, product development and quality operations.

"Despite adverse economic conditions, we are resolved to continue building our pan-Asian franchise. In the last six months, you have seen the acquisition of Dao Heng Bank, a real transformation for DBS creating our second strategic pillar, the purchase of Vickers Ballas, giving us brokerage presence in key Asian markets and our strategic alliances with TD Waterhouse Group, Inc. and CGNU plc, which provides our customers with reach and choice.

"We continue to invest in what creates a real franchise talents, leading edge technologies and quality operations.

"Looking ahead, we must manage short terms issues, boosting revenues and improving productivity throughout the bank. We will adjust our investments but are committed to implement our well-stated strategy."

Consolidation of Dao Heng expands franchise

DBS consolidated Dao Heng Bank Group Limited (Dao Heng) at the end of June as it had acquired an effective 56.9% interest as of June 29, 2001, immediately after the launch of its tender offer for Dao Heng shares. Its pro-rata contribution to the Group's earnings, however, was deemed not material for inclusion in this reporting period. DBS' total franchise, size and scale increased, making DBS the fourth largest bank in Hong Kong, the third largest credit card issuer and one of the leading consumer banks. DBS is now the only bank with market leading operations in both Singapore and Hong Kong.

With Dao Heng, DBS' total assets increased to S$156 billion at June 30, 2001, up from S$108 billion the previous year. In addition, customer loans increased by 32.8% to S$70 billion up from S$52 billion the year prior largely due to Dao Heng. Excluding Dao Heng, assets would have grown by 8.0% to S$116 billion and customer loans would have grown by 2.3% to S$54 billion. With the acquisition of Dao Heng, DBS has reduced the concentration of its assets in Singapore from 80.0% at June 30, 2000 to 55.5%, and has established Hong Kong as its second pillar, with 36.3% of DBS' assets, up from 7.8% of total assets before the acquisition at end June 2000.

DBS announced today that it will extend the offer for Dao Heng shares until August 3, 2001. At the close of the First Offer Period on July 20, 2001, 98.25% of Dao Heng shares had been tendered.

Dao Heng earnings will be consolidated for the entire period in the second half of 2001.

Economic conditions lead to flat loan growth and tighter margins

Without taking into account loans at Dao Heng, DBS' customer loans were relatively flat, showing a 2.3% increase. At the same time, net interest income declined 8.1% from S$1,046 million to S$962 million. Net interest margin for the first half of 2001 was 1.78%, compared to 2.07% for the same period last year. However, compared to the second half of 2000, when the effects of the housing rate competition first took hold, net interest income is down only 3.2% from S$993 million and interest margins are down from 1.97%.

This decline in interest margins was attributable to lower interest margins industry-wide on housing loans, declining lending leverage on deposits, and higher funding costs associated with capital raising.

Jackson Tai, President of DBS said: "The lending market in Singapore has been weak starting in the latter part of last year. It has affected us as well as the other banks in the region. This weakness is, of course, disappointing, but we have maintained our market position and we are poised to take advantage of future loan growth when conditions improve."

DBS focus on wealth management initiatives and fee based income bolsters results

DBS non interest income increased 28.2% in the first half of 2001 to S$566 million from S$442 million in the first half of 2000. A key driving force behind the half-year's increase was Other Income which rose 97.6% to S$275 million as a result of foreign exchange trading business, securities trading and the disposal of the DBS Securities Building. Non-interest income as a percentage of operating income rose from 29.7% last year to 37.1% for the period. Overall, fee and commission income was relatively flat, with a 3.7% decline over first half 2000, resulting in a decline in the fee to operating income ratio from 17.5% for the first half of last year to 16.4% this year. This was mainly due to declines in stockbroking and investment banking fees, reflecting the regional slowdown in capital markets related activities, and the impact of commission liberalisation in the securities business.

DBS has been undertaking a number of initiatives to increase the range and depth of its fee based and other income products. Its overall goal is to create and offer an integrated wealth management suite for its retail customers and to offer a full range of sophisticated treasury, cash management and related services for its corporate and institutional customers.

As part of this strategy, DBS has been actively building up its Treasury & Markets business. DBS today is one of the leading corporate treasury service providers in Asia and a leader in Asian Currency products (e.g., Singapore dollars interest rate swaps), a top three player in Thai Baht swaps and a leader in Equity Derivatives Products in Singapore.

On the wealth management front, DBS has undertaken three key initiatives this year to enhance its integrated financial services suite. First, DBS announced the acquisition of 60% of Vickers Ballas, giving DBS a leading presence not only in Singapore but regionally. This acquisition was followed by the announcement in June 2001 of DBS' 50/50 joint venture with TD Waterhouse Group, Inc., one of the world's leading on-line and self-directed brokerage companies. This morning, DBS announced its third significant move with its bancassurance partnership with CGNU plc, the largest insurer in the U.K. with more than 15 million customers.

Growth in expenses represents investment for the future

Total operating expenses increased 26.1%, mainly due to increased staff costs and other expenses as DBS continues to build a deep management team skilled in regional integration, peg staff compensation to market-based levels, upgrade and improve its technology and operations platform across the region, and aggressively market an increasingly broad range of products and services.

Tai said: "We have been painstakingly building our infrastructure over the years to create the right network and capabilities which are suited to our franchise. To do so, we have been investing in people, IT and our network capabilities, and we have made a lot of progress and our future results will show the benefits of these investments. Already, we have been able to significantly lower our transaction unit costs as well as improve our productivity. Ultimately, the customer benefits as we can offer our products quickly, efficiently and at the best value."

Tai also said that DBS was actively focused on controlling its expenses and has implemented steps to maintain growth in expenses at sustainable levels.

"First half expenses were up significantly by 26.1%, due mainly to timing issues and to one-time staff costs and contractual payments," he said.

"We are committed to holding the line on operating expenses. We have taken steps to manage the full-year 2001 expense increase to a level within last year's 17% annual increase.

"Without compromising our investment in technology and operations, we have rescheduled, downsized, or eliminated several technology and e-business projects in light of the changing business environment. We have taken a serious look at the timing of our expenditures in areas where conditions are soft, such as our securities business. And we will continue to enhance efficiencies throughout the firm."

In addition, DBS has rolled out a Performance Enhancement Program in order to optimise the efficiency of its investment programs. This program, started in the first half of 2001, focuses on ensuring that DBS effectively manages overall expenses and deploys its resources in the most efficient manner possible.

Strong capital position and improved asset quality

DBS capital position remained healthy, even after taking into account the acquisition of Dao Heng. DBS' total capital adequacy ratio was 17.5%, of which 12.0% was Tier I capital. DBS said it was able to maintain its ratios in part by the successful capital raising exercises in March and May of 2001.

With respect to asset quality, DBS said that even during this period of weaker macroeconomic conditions it has been able to achieve further improvements in asset quality. Non-performing loans (NPLs) to total non-bank loans declined to 6.2% from 12.7% the year prior. The consolidation of Dao Heng, which had NPL ratio of 5.0% under MAS guidelines, helped reduce the average. Excluding Dao Heng, the ratio would have been 6.5%. Provision coverage of NPLs has increased to 54.7% as of June 2001 from 51.9% as of June 2000.

The bank has benefited from a disciplined approach to monitoring, restructuring and disposing of its bad loans. "Weak economic periods such as these tend to result in substantial increases in NPLs, but we have greatly increased our credit and risk monitoring abilities and are a much stronger bank now that will withstand adverse conditions better than ever before," said Tai.

Board declares a 14% gross interim dividend

Earlier today, the DBSH Board declared a gross interim dividend equal to 14% to shareholders on record on August 6, 2001.

Conclusion

In addressing the first half results Dhanabalan said, "We have worked very hard over the years to improve our operations. This work has taken many forms Πacquisitions, investments in IT and people, broadening our product range, streamlining our processes and systems. We think our results for the first half reflect some of this progress, but the main benefits will come later as our franchise and our footprint grows and as economic conditions improve."