Singapore bank earnings boosted by higher rates but global slowdown, high inflation cloud outlook

DBS has declared a dividend of 36 cents per share for the second quarter, higher than the 33 cents a year ago. ST PHOTO: ARIFFIN JAMAR

SINGAPORE - DBS Group Holdings joined peers OCBC Bank and UOB in reporting earnings that were boosted by rising interest rates, while also cautioning that risks such as a global economic slowdown lie ahead.

Singapore's largest lender posted on Thursday (Aug 4) a 7 per cent increase in second-quarter net profit to $1.82 billion, its second highest on record and topping the $1.69 billion forecast by analysts in a Bloomberg poll.

DBS has declared a dividend of 36 cents per share for the second quarter, higher than the 33 cents a year ago. This brings its first-half dividend to 72 cents per share.

The bank's earnings inched up 1 per cent from the previous quarter.

Earnings for the first half of the year stood at $3.62 billion, down 3 per cent from a year ago as rising net interest income was offset by lower wealth management fees amid weaker market conditions and a moderation in treasury markets income from the previous year's high, DBS said.

Chief executive Piyush Gupta said a slowdown in economic growth and a mild recession are likely in the United States as interest rates peak at 3.5 per cent to 4 per cent to temper inflation there. 

“In that base case, I think the flow-through to Asia continues to be relatively contained... I don’t see a recession happening in our part of the world. In this scenario, a currency depreciation is also manageable,” he said. 

However, he added that looming uncertainties such as the Russia-Ukraine war could put pressure on energy and food prices and lead to “stubborn inflation”.

Central banks will then have to push through with more aggressive rate hikes that could lead to a significant slowdown and deeper recession in the West, which will have a larger impact on Asia, said Mr Gupta. 

Singapore’s domestic interest rates are largely determined by global interest rates and foreign exchange market expectations of the Singapore dollar.

Rising rates mean pricier loans but customers can also expect higher interest on their deposits, with DBS being the first local bank on Monday to increase rates across the board on its flagship Multiplier savings account.

DBS’ second-quarter net interest income jumped 17 per cent year on year to $2.45 billion in the second quarter. Net interest margin (NIM) - a key gauge of banks’ profitability - rose 13 basis points to 1.58 per cent, and loans grew 7 per cent.

Its report wraps up local lenders’ results season.

DBS chief financial officer Chng Sok Hui (left) and chief executive officer Piyush Gupta during a new conference on Aug 4, 2022. PHOTO: BLOOMBERG

OCBC’s second-quarter net profit jumped 28 per cent to $1.48 billion, while UOB’s rose 11 per cent to $1.11 billion.

Phillip Securities Research analyst Glenn Thum said Singapore banks have benefited across the board from rising interest rates but will still have to contend with declining fee income. 

Market volatility has hit investor sentiment and resulted in lower wealth management and investment banking fees for lenders, although Mr Thum noted banks’ remarks that fee income is stabilising. 

Maybank analyst Thilan Wickramasinghe said lenders’ wealth management businesses continued to see inflows despite macroeconomic headwinds.

“This could catalyse a turnaround in wealth management fees once the visibility of market conditions improve,” he said. 

Lenders received a boost from wholesale lending, where loan repricing is quicker, given shorter durations, he added. 

“We expect NIMs to accelerate as more longer-duration loans such as mortgages get repriced upwards,” said Mr Wickramasinghe.

Mr Thum said the biggest challenge banks will face is continuing to grow their loan book amid the high interest rate environment. 

“All three banks have said they do not see a recession in the near term for the economies they are in, but they expect a general slowdown in growth... While the high interest rates will improve their NIMs, they would need to sustain loan growth in order for net interest income to improve.”

Mr Gupta also said that uncertainty around China’s reopening and systemic risks from the property debt crisis are other things to look out for.

“Our base case is that the situation continues to be controlled and managed,” he said.

“While the macroeconomic outlook remains uncertain, we will benefit from rapidly rising interest rates and have proven nimble in capturing business opportunities... Our ongoing stress tests indicate that asset quality continues to be robust,” he added.

Maybank’s Mr Wickramasinghe said banks will need to watch their asset quality as high inflation could increase their customers’ input costs and squeeze margins, with the situation worsened by rising funding costs.

This may set off delinquencies, or late repayments, which will require proactive monitoring and responses from the banks, he added.

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