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Nikkei Markets

Despite trade war, DBS sees conditions as favoring growth

Higher loans, lower provisions boost quarterly profit, stock moves down

DBS Group Holdings expects loans to grow around 6-7% next year, down from 8% in the first nine months of 2018.   © Reuters

SINGAPORE (Nikkei Markets) -- DBS Group Holdings, Singapore’s largest lender, played down the impact of the trade war on the larger economy and was positive about its prospects despite the slowdown in major markets such as China.

   “There is a lot of angst and anxiety around trade wars. But our own sense is that the direct impact of the trade war on the macro-economy will not be as material as people worry,” CEO Piyush Gupta said at a briefing following the bank’s third-quarter earnings. 

   Gupta cited the difficulty in adjusting global supply chains and moving production of goods worth hundreds of billions of dollars from out of China to support that view.

   “We should be able to continue to grow our business in a sustained way. We also think that the (loan) margins are going to continue to improve,” he added.

   Earlier Monday, the bank posted a 72% rise in third-quarter net profit, driven by higher loans and a steep fall in provisions.

   Gupta singled out the earnings per share to date, which he said had hit a record high. Looking ahead, he said the bank is on track to raise its return on equity to 13% next year, further improving from 12.4% for the first nine months of this year, which is the highest in more than a decade.

   “We are well positioned to continue capitalizing on Asia’s long-term prospects while navigating short-term uncertainties,” he said.

    Overall, the bank, which has large operations in Singapore and Hong Kong, earned 1.41 billion Singapore dollars ($1.03 billion) in the three months ended September, just shy of the $1.466 billion median estimate of analysts polled by Refinitiv.

  The stock fell after the results. At the midday break, DBS’s shares were down 2.6%, exceeding the 1.9% drop in the benchmark Straits Times Index on a generally gloomy day for Asian markets.

  Marcus Chua, a Nomura analyst, said the weakness in DBS’s earnings was largely due to still weak treasury income and a drop in loan recoveries and settlement.

   Still, Nomura continues to have a “buy” rating on the stock due to expectations of higher loan margins and a rise in the bank’s return on equity.

   DBS is the last of Singapore’s three major banking groups to report earnings for the September quarter. Net profit for Oversea-Chinese Banking Corp. rose 12% while that for United Overseas Bank increased 17%.

   As was the case with its two smaller rivals, the on-year jump in DBS’s net profit was due primarily to its lending business. Loans grew 8% while net interest margin improved by 13 basis points to 1.86%, helped by higher interest rates in Singapore and Hong Kong.

   Allowances for the third quarter amounted to S$236 million, down from S$815 million a year, when the bank wrote down its exposure to weak oil and gas support services.

   Gupta said DBS expects loans to grow around 6-7% next year, down from 8% in the first nine months of 2018, while net interest margin - the difference between the bank’s borrowing and lending costs - would continue to widen due to further U.S. interest rate hikes next year.

   He added that asset quality would likely remain stable albeit with a moderate deterioration in DBS’s small- and medium-sized enterprises loan portfolio, which tended to happen in a rising interest rate environment.

   Net fee income rose 1% as increases in a wide range of activities were offset by a two-thirds decline in investment banking fees.

   Other non-interest income rose 2%. Net trading income rose 34% as treasury markets trading gains improved from a low base. However, that was offset by a 60% decline in net gains from investment securities.

--Kevin Lim

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