DBS Has Surprise Quarterly Loss on Goodwill Charge
July 30, 2010, 3:15 AM EDTBy Joyce Koh
(Adds DBS’ CEO comment on goodwill charges in Hong Kong in seventh paragraph, trading income in 13th paragraph.)
July 30 (Bloomberg) -- DBS Group Holdings Ltd., Southeast Asia’s biggest bank, reported an unexpected second-quarter loss as it booked a one-time goodwill impairment charge at its Hong Kong unit because of pressure on interest margins.
The loss of S$300 million ($220 million) compares with net income of S$552 million a year earlier, the company said in a statement today. The average estimate of eight analysts surveyed by Bloomberg was for a profit of S$572.9 million. Excluding the S$1.02 billion goodwill charge, DBS’ net income for the second quarter rose 30 percent to S$718 million.
DBS said it booked the charge for its Hong Kong unit because “noticeable and persistent strains” in wholesale funding markets meant interest margins will continue to fall. In February 2006, DBS took a charge of S$1.1 billion for its purchase of Hong Kong’s Dao Heng Bank. That led to a net loss of S$441 million, the biggest since it began quarterly reporting in 2001, the same year the bank bought Dao Heng for $5.4 billion.
“To take this write-off when interest rates are at a historic low is prudent,” said Pauline Lee, an analyst at Kim Eng Securities. “They are also addressing the competitive market for deposits in Hong Kong, which might lead to an increase in funding costs, unlike in Singapore where they dominate the low-cost deposit franchise.”
Lee said her “buy” rating on DBS is under review.
DBS rose as much as 1.4 percent before giving up gains to trade 0.1 percent lower at 2:58 p.m. in Singapore. The city- state’s benchmark Straits Times Index was 0.5 percent lower.
Hong Kong Expansion
DBS doesn’t expect to take more goodwill charges in Hong Kong, Chief Executive Officer Piyush Gupta said at a press briefing in Singapore today. He said DBS is committed to expanding its Hong Kong business, driven by services linked to China’s growing economy, lending to small- and medium-sized firms and wealth management. The Hong Kong unit’s earnings fell 34 percent to S$65 million in the second quarter.
Net interest income, or the difference between what the bank makes from lending and what it pays on deposits, fell 4 percent to S$1.07 billion in the quarter from a year earlier. The net interest margin, a measure of loan profitability, narrowed to 1.84 percent from 2.01 percent a year earlier.
The three-month Hong Kong interbank offered rate, or Hibor, has averaged 0.2 percent over the past year. Hong Kong accounts for 21 percent of DBS’ assets and 19 percent of net interest income, according to data compiled by Bloomberg.
Sibor
Singapore’s three-month interbank lending rate, or Sibor, which has averaged 0.6 percent this year, also remains one of the biggest challenges to DBS and rivals Oversea-Chinese Banking Corp. and United Overseas Bank Ltd.
RBS analyst Trevor Kalcic on July 14 cut his recommendation on DBS from “buy” to “sell,” saying the bank’s earnings may “disappoint” in the short term because of the city-state’s low interbank rate and rising costs. “The problem is that DBS no longer has room to cut its cost of funds, while pressure on asset yields remains,” Kalcic said.
Non-interest income in the quarter rose 10 percent to S$748 million. DBS’ net fee and commission income was unchanged at S$358 million from a year ago, as declines in stock-broking and loan syndication activities were offset by higher wealth management fees.
Trading Income
Its quarterly net trading income rose 14 percent to S$266 million from a year ago, driven by customer-related revenues.
DBS’ net loans grew 14 percent to S$146.1 billion from a year earlier as businesses and home buyers borrowed more in Singapore and Hong Kong. Total loans in Singapore rose to S$292.5 billion in May from S$288.1 billion a month earlier, data from the Monetary Authority of Singapore showed.
The Singapore government expects the Southeast Asian island’s economy to expand 13 percent to 15 percent in 2010. Growth accelerated to 18.1 percent in the first half, the fastest pace since records began in 1975.
The Monetary Authority of Singapore does not expect global proposals on bank capital and liquidity to effect Singapore banks in a “significant manner”, according to its managing director Heng Swee Keat in a speech yesterday.
--Editors: Brett Miller, Lars Klemming.
To contact the reporter on this story: Joyce Koh in Singapore at jkoh38@bloomberg.net
To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net
