DBS Q3 profit rises 31% to $1.7 billion, beating forecasts

DBS has declared a dividend of 33 cents per share for the third quarter, bringing the dividend for the first nine months to 84 cents a share.
DBS has declared a dividend of 33 cents per share for the third quarter, bringing the dividend for the first nine months to 84 cents a share.PHOTO: ST FILE

SINGAPORE - DBS Group Holdings posted on Friday (Nov 5) a better-than-expected increase in third-quarter earnings on improved asset quality and higher fee income at Singapore’s largest lender. 

Net profit rose to $1.7 billion, topping the $1.56 billion forecast by analysts in a Bloomberg poll.

DBS has declared a dividend of 33 cents per share for the third quarter, up from 18 cents a year ago, bringing the dividend for the first nine months to 84 cents a share.

This follows the Monetary Authority of Singapore's lifting of restrictions in July that capped dividend payouts from local banks and finance companies at 60 per cent of the previous year's dividend amid the coronavirus pandemic.

DBS' results wrapped up the earnings season for local lenders after peers OCBC and UOB reported on Wednesday. OCBC’s third-quarter net profit rose 19 per cent year on year to $1.22 billion, while UOB’s jumped 57 per cent to $1.05 billion. 

DBS chief executive Piyush Gupta said broad-based business momentum was sustained in the third quarter and the bank's pipelines remain healthy into next year.

"A progressive normalisation of interest rates in the coming quarters will be beneficial to earnings. Asset quality continues to be resilient and total allowances are likely to remain low," he said in a statement.

He added that these factors will offset expected cost pressures as the economic recovery takes hold.

Mr Gupta also  told reporters on Friday that the bank’s loan growth is diversified across countries and industries.

But he added: “In a normal year pre-pandemic, we were seeing 4 to 5 per cent loan growth. This year, it will be 9 to 10 per cent. I don’t see the 9 to 10 per cent repeating next year because we don’t have the low base effect. But somewhere between 6 to 7 per cent is possible.” 

DBS’ third-quarter net interest income fell 3 per cent to $2.1 billion. Net interest margin (NIM) - a key gauge of banks’ profitability - decreased 10 basis points to 1.43 per cent and was moderated by broad-based loan growth.

Fee income stood at $888 million, the second highest after the first quarter’s record of $953 million. It rose 11 per cent from a year ago due to higher wealth management, transaction services and card fees.

Mr Gupta said the re-opening of economies has helped the bank’s cards business, with total spend on a par with pre-pandemic levels and potentially boosted further as travel resumes. 

Other non-interest income amounted to $569 million, down 6 per cent from a year ago, as higher trading gains were more than offset by a decline in investment gains.

But DBS also wrote back general allowances of $138 million as its portfolio quality improved, bringing the nine-month write-back to $413 million. 

After setting aside $68 million in specific allowances, total write-back for the quarter came to $70 million, compared with the $554 million it set aside a year ago. 

DBS’ net profit was flat compared with the previous quarter. Earnings for the first nine months stood at $5.41 billion, up 46 per cent from a year ago. 

The bank’s third-quarter expenses stood at $1.67 billion, up 8 per cent from a year ago. 

Mr Gupta said wage inflation has put some pressure on costs: “My own view is that despite what the (Federal Reserve) central bankers are saying, inflation could be a little bit more than transitory.” 

“We were originally planning not to do salary hikes this year, but the market situation and conditions compelled us to take salary actions in the middle of the year. 

"The positive is that if there is an inflationary impulse, you could see a much stronger interest rate outlook.”

But the bank is not waiting for the expected rate hikes in the US next year to grow its investments in its digital platforms and artificial intelligence capabilities, Mr Gupta said, pointing to competition from upcoming digital banks and the bank’s returns on its digital investments so far. 

DBS said earlier this week that it will invest $300 million in 2022 – a 14 per cent year-on-year increase – to boost its digital-banking capabilities for its wealth and retail customers.

Mr Gupta added that the bank is looking at opening up its DBS Digital Exchange – which serves institutional and accredited investors – to the broader retail market. The exchange was launched last December and now holds over $500 million in assets under custody.

Maybank Kim Eng research head Thilan Wickramasinghe said the focus for Singapore banks will likely shift from asset quality this year to growth in 2022. 

“The uneven pace of recovery in South-east Asia and potential slowdowns in North Asia are key headwinds. Similarly, potential for higher operating costs – from rising labour as well as technology and business expenses – should be another area to watch,” he said. 

He added that headwinds to banks’ NIMs are likely to persist: “However, as regional economies re-open we expect broader loan demand to flow through – especially from SMEs. Spreads here are wider. Together with the potential for higher policy rates, NIMs should see improvements in 2022.

“Cheap deposit growth also seems to have peaked. This may help ease some of the excess liquidity on the sector balance sheets.”

Mr Paul Chew, head of Phillip Securities Research, said higher interest rates will be a huge advantage for banks due to their variable rate loans and excess deposits: “A 10 basis point rise in interest rate could improve earnings by 3 per cent.” 

He added that excess liquidity has led banks to pursue more competitive corporate loans. 

DBS Group Research analyst Lim Rui Wen said: “We expect banks to continue benefiting from a more benign credit environment, continued business momentum and... a higher interest rate environment towards the second half of next year, as the market continues to price in more than two rate hikes by end-2022.”