DBS flags pick-up in growth led by wealth management, stable credit costs

SINGAPORE (Reuters) - Singapore bank DBS Group painted an optimistic picture for 2021 as a pandemic-induced slowdown gives way to an improved business performance, driven by wealth management, while credit costs decline as government moratorium programs come to an end.

FILE PHOTO: A DBS bank signage is pictured in Singapore September 5, 2017. REUTERS/Edgar Su

On Wednesday, Southeast Asia’s biggest lender reported a 33% drop in net profit for the quarter ended December as benchmark interest rates plunged to historic lows and crimped margins, contributing to a 26% fall in full-year profit.

“DBS wrapped up a turbulent 2020 with a very strong balance sheet, supported by good asset quality, high capital and excess liquidity,” said Eugene Tarzimanov, a senior credit officer at Moody’s Investors Service.

“We expect credit costs to decrease in 2021 as DBS has already completed the bulk of provisioning, with asset risks receding and economic conditions improving,” Tarzimanov said.

Analysts expect strong revenue from the wealth business to drive a rebound in Singapore banks’ full-year profit, with better economic prospects also expected to cushion the impact on their interest margins hovering near record lows.

DBS’ net interest margin, a key gauge of profitability, dipped to 1.49% in the fourth quarter from 1.86% a year earlier. The bank earns most of its profit from Singapore and Hong Kong.

“The risks are well known,” said Chief Executive Piyush Gupta, referring to a further compression in net interest margins expected this year. “So the question is if there’s enough economic activity to cover up the revenue headwind,” he told a news conference.

Singapore’s trade-reliant economy is charting an uneven path to recovery after its worst-ever recession last year due to the COVID-19 pandemic.

DBS said allowances for loan losses surged to S$577 million ($435.3 million) in the fourth quarter from S$122 million a year earlier but rose only slightly from the third quarter.

As interest rates decline, banks are turning to wealth management businesses to boost growth on the back of record-high equity markets and strong trading volume.

Double-digit growth in the wealth management business over the past five years has enabled this segment to account for the biggest chunk of net fee and commission income for Singapore banks as of the end of 2019.

“Overall, the fee income for January gives me confidence that we can do double-digit growth in fee income,” Gupta said, adding that DBS was set to report modest loan growth this year.

DBS, the first local lender to report results, posted net profit of S$1 billion for the quarter ended December, versus an average estimate of S$1.02 billion ($769.6 million) from four analysts, according to Refinitiv data.

“This quarter was largely on expected lines with no big surprises - margins weakened and provisions stayed about the same which you would expect for the fourth quarter to close the year,” said Kevin Kwek, a senior analyst at Stanford C. Bernstein.

DBS’ peers OCBC and UOB report results later this month.

($1 = 1.3256 Singapore dollars)

Reporting by Anshuman Daga; Editing by Jane Wardell and Christopher Cushing