DBS Group Holdings Ltd. (DBS), the lender that offered to buy PT Bank Danamon Indonesia for $7.2 billion, posted first-quarter profit that unexpectedly climbed 16 percent to a record on higher income from interest and trading.
Net income advanced to S$933 million ($751 million) in the three months ended March 31 from S$807 million a year earlier, the Singapore-based lender said in a statement to the stock exchange today. That exceeded the S$755.2 million average of six analysts’ estimates compiled by Bloomberg.
The earnings beat expectations as the bank set aside less money for bad loans and as revenue from trading climbed, said Matthew Smith, a Singapore-based analyst at Macquarie Group Ltd. DBS is seeking to seal the Danamon (BDMN) acquisition amid concerns raised by Indonesian regulators on the deal’s merits for local financial institutions.
“The operational outlook for the business looks fine,” Smith said. “But there are headwinds in getting approvals for the Danamon deal and integrating the business. That’s a big project.”
Bank Indonesia will process the bid after reaching an agreement with the Monetary Authority of Singapore, Governor Darmin Nasution said in Jakarta today. The new rules on ownership of financial institutions in Indonesia will be finished by June, he said.
Shares of Southeast Asia’s largest lender rose 2 percent to S$14 at the close in Singapore, their biggest gain in a month. The stock is also the second-best performer on the benchmark Straits Times Index. (FSSTI) Danamon lost 6.4 percent to 5,900, the most since Oct. 4.
Trading income climbed 13 percent in the quarter to S$292 million, DBS said in today’s report, driven by the sale of treasury products. Financial markets rallied worldwide in the period as Europe’s debt crisis eased and U.S. unemployment fell, helping to boost trading revenue at lenders including Bank of America Corp.
Allowances for credit and other losses declined 37 percent from the fourth quarter to S$144 million, which analysts including Smith said helped beat estimates.
Net interest income, the difference between what a bank makes from lending and what it pays on deposits, grew 19 percent last quarter from a year earlier to S$1.3 billion.
Profitability on loans, or net interest margin, narrowed to 1.77 percent for the bank, which derived more than 80 percent of its 2011 revenue from Singapore and Hong Kong, where this measure is the lowest. DBS is buying Danamon as part of efforts to expand in markets with higher margins.
The Singapore lender, which state-owned Temasek Holdings Pte has the biggest stake in, offered to pay its parent company 45.2 trillion rupiah ($4.9 billion) in new shares for its 67 percent stake in Jakarta-based Bank Danamon. It also made a cash offer for the remaining stock for 21.2 trillion rupiah at a 52 percent premium from the previous closing price. Temasek will increase its stake in DBS to 40.4 percent from 29.5 percent.
Earnings growth may lose momentum on costs relating to the purchase of Danamon as well as slowing credit expansion and higher provisions for bad loans, analyst Wee Siang Ng said before today’s numbers were published.
‘Drag on Earnings’
“The Danamon deal will be a drag on earnings this year, though this drag will be more visible in 2013 and 2014,” said Ng, an analyst at BNP Paribas Securities Singapore Ltd.
DBS is paying more for Danamon than the median book value for banking deals over $1 billion as it seeks to diversify away from Singapore and Hong Kong. DBS Chief Executive Officer Piyush Gupta said this week that earnings per share may be lower for two years after the takeover, while adding that his bank is paying fair value given Indonesia’s “high-growth, high-return market.”
These are “clearly a good set of numbers, but the results may not be enough to dispel the current market concerns surrounding the offer price for the proposed acquisition of PT Bank Danamon,” Kar Weng Loo, a Singapore-based analyst at HSBC Holdings Plc, wrote in a note to clients.
Indonesian officials have expressed reservations about DBS’s bid, the largest by a Southeast Asian lender, since it was announced on April 2. Deputy Finance Minister Mahendra Siregar voiced concern last week that Danamon as a national institution would be lost.
“We talked with the Monetary Authority of Singapore about this in Washington and we told them that we can’t process it now as we have to wait until the new regulation comes out,” Nasution said. “We also talked about reciprocity. The regulation isn’t meant to hamper foreign investors but it’s meant for us to be more prudent.”
Karen Ngui, a DBS spokeswoman, declined to comment on Nasution’s remarks. Singapore’s central bank said April 9 that all foreign banks are free to expand in the city-state based on the guidelines specified by their licenses, adding today that the views remain the same. It also said discussions with other regulators are confidential.
Acquiring the Indonesian bank will help DBS add 3,000 Danamon branches to its network in an economy that grew last year at 6.46 percent, the fastest pace since before the 1997 Asian financial crisis. By contrast Singapore grew 4.98 percent, and the expansion will slow to 2.8 percent this year, according to economists surveyed by Bloomberg.
DBS’s loan book grew 25 percent from a year earlier to $200.7 billion. That compares with an average 22 percent for the previous four quarters, according to data compiled by Bloomberg.
Net fees and commissions declined 2 percent to S$406 million as earnings from stock broking, investment banking and fund management dropped.
The earnings were “underpinned by sustained loan growth, broad-based non-interest income, as well as higher contributions from all our markets,” Chief Executive Officer Piyush Gupta said in the statement, adding that it’s “well-placed to seize opportunities in the months ahead.”
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