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Nikkei Markets

DBS positive about outlook despite slowing loan growth

Loss in treasury operations limits quarterly profit

SINGAPORE (Nikkei Markets) -- DBS Group Holdings posted a smaller than expected net profit for the second quarter, but its chief executive was positive about the outlook for bank even though loans are expected to grow at a slower pace in the second half.

"While there are gathering clouds, the region's prospects remain intact, enabling us to continue capturing growth opportunities," Piyush Gupta said in a statement.

Turning to the rising U.S.-China trade tensions, Gupta told reporters at a briefing that while these were a concern, the tariffs announced by both sides would not have an immediate impact on global trading volumes due to the difficulty in adjusting supply chains in the short term.

DBS, Southeast Asia's largest bank by assets, reported net profit of 1.37 billion Singapore dollars ($1.01 billion) for the second quarter ended June, a 20% rise year on year boosted by strong growth in loans and higher interest margins, which offset the weakest trading performance in more than eight years.

The earnings fell short of analysts' expectations for net profit of around S$1.44 billion. However, most appeared unperturbed since the difference was due to treasury operations that tend to be volatile from quarter to quarter.

At the briefing, Gupta said DBS' treasury markets operations were hit by a perfect storm as the narrowing spread between short and long-term interest rates crimped trading opportunities while the value of Asian credits in its portfolio declined. Asian stock markets also retreated during the quarter, further damping earnings.

It was "the worst quarter for treasury markets since I joined," said the former Citi executive, who took over the top job at the Singapore lender in November 2009.

According to DBS' earnings statement, treasury markets recorded a pretax loss of S$50 million during the quarter compared to a profit of S$123 million a year ago, while total income fell 59% on year to S$107 million.

Gupta was a lot more positive about the bank's other businesses, noting the strong momentum in areas such as credit cards, wealth management, and small and medium-sized enterprise lending.

DBS said that its net interest income rose 18% on year to S$2.22 billion during the second quarter as loans grew 12% and the net interest margin widened by 11 basis points to 1.85%. Net fee income increased 11% to S$706 million, led by growth in its wealth management and the cards business.

For the first six months of 2018, net profit increased 23% to a record S$2.89 billion on the back of broad-based growth in loans and fee income, higher interest margins and a sharp drop in specific allowances for bad debts.

DBS's net profit for the second quarter was 10% below the first quarter's S$1.52 billion due to the weaker trading performance and the absence of a property disposal gain.

Leng Seng Choon, an analyst at RHB Equity Research, said the positives in DBS' second quarter results included higher Singapore and Hong Kong interest rates, which pushed up interest margins as well as quarter on quarter growth in lending. However, he noted sequential weakness in wealth management fees, which dragged down fee and commission income.

Looking ahead, DBS said it now expects loans to grow by 6-7% for the full year instead of its earlier forecast of 8%. The slower rise in lending would be offset by higher net interest margins, which should average around 1.85%, it added.

Gupta said DBS has been scaling back on trade financing due to the low margins, while housing loans and loans to developers would not grow as much as earlier expected due to property cooling measures introduced by the Singapore government last month.

--Kevin Lim

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