DBS second-quarter 2004 earnings rise to $847 million
Exceptional gains boost results by $497 million
Broad based growth in businesses led by consumer banking, sme banking, investment banking
Loans up 9% year on year
The results included $497 million of gains from the sales of the Group's 59% stake in DBS Thai Danu Bank (DTDB) and a 10% interest in Hong Kong's Wing Lung Bank. Excluding these amounts, second-quarter earnings were higher by 105% at $350 million, and first-half earnings by 90% at $838 million. Excluding the exceptional gains of $497 million, the $350 million quarterly net profit is one of the highest since DBS introduced quarterly reporting almost three years ago.
DBS Vice-Chairman and CEO Jackson Tai said: "Our lending business showed broad-based improvement in spite of the uncertainties in the interest rate outlook and concerns over China's overheating economy. These uncertainties affected financial market sentiment and volumes during the second quarter.
"The continued growth in our businesses with recurring earnings reflect our ability to leverage the region's improving economic conditions. We are encouraged by the progress in investment banking, trade finance, SME banking, and consumer banking businesses. Loans increased, margins stabilised, and provision requirements fell. The pipeline of loan and capital market transactions remains healthy across all our business segments.
"We are seeing payback from our geographical and product diversification."
- Net interest income rose a fourth consecutive quarter and was 16% higher than second quarter 2003. Loans were 9% higher.
- Treasury income of $101 million was lower than the $158 million in second quarter 2003 and $252 million in first quarter 2004.
- Operating profit before goodwill, provisions and exceptional items grew 9% over the year-ago period to $574 million. For first-half 2004, it increased 18% over the year-ago period to $1.34 billion.
- Non-performing loans fell from 4.6% in March 2004 to 3.0% of loans, nearing pre-Asian crisis levels, while the 83% provision coverage was the highest since 1998. As a result of better asset quality, provision charges fell to $11 million during the quarter.
- DBS Thai Danu Bank (DTDB) was deconsolidated on 25 June 2004 which, with other adjustments, reduced Group loans by $3.3 billion and deposits by $3.4 billion.
- Net profit for DBS Bank (Hong Kong) grew 80% over second quarter 2003 to $142 million, but was 7% lower than first quarter 2004. Earnings grew on the back of higher spreads and an 8% growth in loans.
- Net interest income edged up 9% to $215 million while non-interest income was 14% higher due to increase in loan-related fees and stronger sales of wealth management products and unit trusts.
- For the quarter, annualised GAAP ROE was 12.1% and cash ROE was 14.9%. Excluding exceptional items, annualised GAAP ROE of 9.1% and cash ROE of 11.9% were better than the previous three years' annual returns.
- The Board declared a 29% increase in the interim dividend from 14 cents a share to 18 cents.The capital adequacy ratio was 15.6% with tier-1 at 11.6% under the framework recently instituted by the Monetary Authority of Singapore.
Interest income grew for the fourth consecutive quarter
The Group's $651 million in net interest income grew 16% over the year-ago period and 3% over the previous quarter. Interest margins remained steady at 1.79% from the previous quarter as softness in customer loan margins was offset by higher returns on interbank assets and debt securities as interest rates rose.
Adjusting for the deconsolidation of DTDB, overall loans rose 4% over March 2004 and 9% over June 2003 to $65.1 billion. DBS' sixth consecutive quarter of loan expansion resulted from both corporate and consumer demand. Loans to small- and-medium-sized enterprises in Singapore and Hong Kong, a segment that the Group has emphasized, increased 16% over June 2003. The growth in consumer loans was led by private- and public-housing mortgages and car finance. The loan-deposit ratio was 60%; if non-trading debt securities were included, the ratio rose to 81%. Both ratios were higher than the previous quarter and year-ago period.
Non-interest income boosted by $497 million of exceptional gains
Non-interest income was boosted by a $187 million gain from the sale of Wing Lung Bank and a $310 million accounting gain arising from the exchange of the Group's stake in DTDB for a 16% interest in Thai Military Bank. The high level of exceptional gains moved the ratio of non-interest income to total income to 58%, up from the record high 50% ratio for the first quarter 2004.
Treasury activities contributed $101 million to non-interest income. This was 36% lower than the $158 million earned in the year-ago period and 60% less than the $252 million in the previous quarter. Smaller gains were recorded in trading activities, including bonds and interest rate derivatives, as interest rate uncertainty resulted in a difficult trading environment. Sales of retail structured products declined 25% to $2.06 billion in second quarter 2004 from $2.74 billion a quarter ago, but was similar to the amount chalked up in the year-ago period.
Fee income of $240 million was higher than the $213 million in the year-ago period but below the $277 million recorded in the previous quarter. Less buoyant equity markets reduced stockbroking income to $44 million from $69 million in first quarter 2004. Wealth management fees (for the distribution of unit trusts and bancassurance) were $24 million, compared to $34 million in the previous quarter.
Investment banking fees of $22 million were at levels comparable to the year-ago period as well as first quarter 2004. Loan-related fees remained strong at $47 million, due to high number of loan syndication transactions. DBS again was at the lead in important capital market transactions, which included the bank's role as financial advisor in CapitaLand's $2 billion launch of a landmark commercial REIT. During the first six months, the Bank commanded a 30% share by value of the Singapore IPO market. DBS also won several IPO mandates in Hong Kong, notably the HK$600 million listing of Li Ning Group, China's leading sportswear company.
Trade finance and remittance fees improved to $32 million from last year's $27 million, reflecting in part the renewed emphasis in the SME business in Hong Kong, Singapore and the region.
Continued cost discipline
Operating expenses of $482 million were 5% above the year-ago period, but 4% below the previous quarter. Revenue-related expenses fell 11% from the previous quarter in line with lower operating income. Expenses related to occupancy and technology were stable.
Staff costs were 10% lower than first quarter 2004 due to lower bonus accruals. The deconsolidation of DTDB reduced headcount by 1,611 at the end of second quarter, bringing total full-time staff to 10,838, down from 12,173 in first quarter 2004.
Other expenses increased 9% from first quarter 2004 as a result of heavier advertising and promotion activities for consumer banking as well as consultancy fees. The cost-income ratio was 31% for the quarter. Excluding exceptional items, the 46% cost-income ratio was similar to the year-ago period, but higher than the 40% recorded in first quarter 2004.
Best asset quality level since Asian financial crisis
Non-performing loans (NPLs) fell to 3.0% of loans from 4.6% in March 2004 and 5.9 % in June 2003. The improvement was partly due to the DTDB deconsolidation, which removed $879 million worth of NPLs from the accounts during the quarter. Without the DTDB deconsolidation, the NPL ratio would have declined to 4.1%.
Total NPLs stood at $2.2 billion in June 2004, which was 10% lower than the $2.4 billion (excluding DTDB) in March 2004 and 31% below the $3.1 billion (excluding DTDB) in June 2003. Most of the existing NPLs (72%) are in the sub-standard category, compared to the more severe classifications of doubtful or loss.
Provision coverage improved to 83%, compared to 68% in March 2004 and 60% in June 2003, and is now almost double the provision coverage just after the Asian financial crisis. The rise in coverage was partly due to the deconsolidation of DTDB's NPLs without totally writing back provisions that had been set aside for them. With the improvement in asset quality and provision coverage, provision charges fell to $11 million, compared to $187 million in the year-ago period and $50 million in the previous quarter.
Capital and dividends
Under the new capital adequacy framework instituted by the Monetary Authority of Singapore, DBS's total capital adequacy ratio at 30 June 2004 was 15.6%, with the tier-1 ratio at 11.6%.
DBS also announced that its Board of Directors declared the payment of 18 cents per share interim ordinary dividend, a 29% increase from the 14 cents per share interim ordinary dividend paid in 2003.
Headquartered in Singapore, DBS is one of the largest financial services groups in Asia. The largest bank in Singapore and the fifth largest banking group in Hong Kong as measured by assets, DBS has dominant 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 and affiliates in Thailand, Indonesia, India and The Philippines. In China, the bank has branches and representative offices in Shanghai, Beijing, Shenzhen, Fuzhou and Tianjin. The Bank's credit ratings are among 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.