News analysis

The (bad loan) woods are dark and deep for DBS

For DBS Group Holdings, South-east Asia's largest bank, the woods of non-performing assets are not at all lovely. They are just dark and deep.

Bad loans rose slightly from the previous quarter to 1.5 per cent, the bank said in its June earnings report yesterday.

The details behind that number, though, are bleak.

For one thing, the non-performing loans ratio shot up by one full percentage point in just three months to 4.6 per cent on its South and South-east Asia portfolio, a reflection perhaps of DBS' soured loan troubles in India.

Also, but for a near-tripling of write-offs in the first half, the $4.83 billion in non-performing assets would be considerably higher than a year earlier.

Low oil prices will probably keep credit costs elevated on loans to Singapore's troubled offshore and marine industry, CEO Piyush Gupta said.

It is hard to see how things can improve in a hurry at DBS: Singapore's property market may be bottoming out, but a strong recovery is not on the horizon.

Bad loans rose from the previous quarter to 1.5 per cent, DBS said in its June earnings report. The non-performing loans ratio shot up by one full percentage point in three months on its South and South-east Asia portfolio. PHOTO: BLOOMBERG

The push into private banking - the bank bought Australia and New Zealand Banking Group's retail and wealth management franchise in some Asian markets last October - is paying off.

Trading and equity underwriting remain weak spots, however.

Singapore's short-term interest rates, a benchmark for loan pricing, are failing to keep pace with the London Interbank Offered Rate, hurting profitability. The net interest margin was an anaemic 1.74 per cent in the June quarter, a 13-basis-point decline from a year earlier.

Fintech is the big hope. As the Singapore central bank relaxes rules on lenders owning non-financial businesses, DBS might be able to deploy as much as US$3 billion (S$4.1 billion), or 10 per cent of equity, at the intersection of e-commerce and payments to ward off a growing threat from the Chinese tech trinity of Baidu, Alibaba Group Holding and Tencent Holdings.

Investors who have pushed the Singapore lender's shares to an 18-year high should be a trifle disappointed by this year's 10.6 per cent return on equity.

That is double that of Standard Chartered, the other big bank to be roiled by a blow-up in Asian emerging markets.

Still, at 1.24 times, DBS' price-to-book ratio is slightly lower than that of OCBC Bank, the No. 2 Singapore lender by assets.

In the short run, Mr Gupta can retain investors' trust by boosting the annual dividend payout ratio from 36 per cent.

Beyond palliatives though, he needs to chalk up a few percentage points on the return-on-equity odometer before he can sleep - or at least hang up his boots.

• This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

A version of this article appeared in the print edition of The Straits Times on August 05, 2017, with the headline 'The (bad loan) woods are dark and deep for DBS'. Print Edition | Subscribe