DBS Outpaces Rivals in Capitalizing on Higher Singapore Rates

  • Higher net interest margin helps quarterly profit rise 6%
  • Bank's net interest income rises 13% to all-time high

DBS Group Holdings Ltd. boosted its interest margins in the third quarter to a four-year high as the bank outpaced its rivals in capitalizing from higher Singaporean borrowing costs by cutting exposure to high-cost deposits.

The lender, Southeast Asia’s largest, said Monday its net interest margin, a measure of lending profitability, rose three basis points to 1.78 percent in the September quarter from the previous quarter. Margins for Oversea-Chinese Bank Corp. and United Overseas Bank Ltd. were either unchanged or fell in the period, according to their earnings releases last week.

The higher margins helped DBS report a 6 percent increase in net income for the three months ended Sept. 30 to S$1.07 billion ($761 million), beating analyst estimates, as net interest income rose 13 percent. While DBS benefited from domestic interest rates close to the highest levels since 2008, weakening regional economies in its home market to China and Southeast Asia have dragged on lending.

DBS reported “overall positive results against a tough environment,” Kevin Kwek, a Singapore-based Sanford C. Bernstein & Co. analyst, wrote in an e-mail Monday. “Unlike peers, DBS came within expectation of being able to raise net interest margins.”

The company’s shares declined 0.6 percent as of 2:52 p.m. local time, compared with the benchmark Straits Times Index’s 1.4 percent drop. The lender is the last of Singapore’s three publicly traded banks to report quarterly profit.

Borrowing Costs

The amount of fixed-term deposits held by DBS, which typically carry higher interest rates to compensate customers for locking their funds away, dropped by 5 percent in the September quarter from a year earlier, an exchange filing showed. Those deposits accounted for 39 percent of total deposits, down from 43 percent.

OCBC’s fixed-term deposits rose 5.4 percent from a year ago, while UOB’s expanded 6.7 percent, the lenders said last week in their earnings reports.

OCBC’s net interest margin fell to 1.66 percent in the third quarter from 1.67 percent as of June. UOB’s margin was at 1.77 percent, unchanged from three months earlier.

Loan Demand

A climb in the three-month Singapore interbank offered rate, or Sibor, this year has helped DBS’s interest margins. While the rate has dropped from its Sept. 17 peak of 1.14 to 1.07 percent as of Friday, it’s still more than double its level from a year earlier amid expectations the U.S. Federal Reserve will soon move to increase interest rates.

“While the Singapore banks are facing slower loan demand, we believe margins will remain stable over the next few quarters with potential upside when U.S. interest rates rise,” Sharnie Wong, an analyst at Barclays Plc in Hong Kong, wrote Monday in an e-mailed report. “Asset quality so far remained manageable.”

DBS’s loans grew 9 percent in the September quarter largely because of currency effects, the bank reported. Excluding foreign-exchange factors, loans will grow 5 percent this year and 6 percent in 2016, Chief Executive Piyush Gupta said Monday at a media briefing in Singapore. The bank may also see about 7 percent-8 percent of “top line growth” in its core businesses next year, Gupta added.

Higher Provisions

Net fee and commission income declined 7 percent to S$517 million as investment-banking fees slumped 65 percent from a “high base” a year ago, the bank said. From the previous quarter, net fee income retreated 11 percent as market volatility cut wealth management, investment banking and brokerage fees, it said.

DBS set aside higher provisions for credit and other losses in China, where data at the weekend showed the nation’s manufacturing industry contracted for a third straight quarter. The bank more than doubled such allowances for its Greater China business, which posted a 39 percent drop in net income for the third quarter.

That figure excludes its Hong Kong business, which was the second-largest income contributor after Singapore with a 46 percent increase in profit. Net income from Singapore grew just 1.6 percent, DBS said.

Singapore’s gross domestic product grew an annualized 0.1 percent in the three months through September from the previous quarter, the trade ministry said Oct. 14. While the expansion was unexpected, the city narrowly avoided a technical recession following a 2.5 percent contraction in the April-June period.

“We will start seeing impacts” from regional stimulus measures in the next few quarters, DBS’s Gupta said at the media briefing.

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