Singapore’s Biggest Banks Post Profit Gain on Lending Income

Feb 14, 2014 4:31 am ET

(Updates with UOB earnings from fifth paragraph.)

Feb. 14 (Bloomberg) -- DBS Group Holdings Ltd. and Oversea- Chinese Banking Corp., Southeast Asia’s two biggest lenders, posted an increase in fourth-quarter core profit as interest income climbed.

DBS’s net income excluding one-time gains rose 6 percent to S$802 ($634 million) for the quarter ended Dec. 31, from S$760 million a year earlier, according to a statement posted on the Singapore stock exchange. Including items such as the sale of stakes in a Philippine bank, profit declined 20 percent to S$973 million. Oversea-Chinese Banking Corp.’s profit rose 8 percent in the three months, beating analysts’ estimates.

The two Singapore banks are tapping growth in overseas markets and from fee-based businesses such as wealth management as they grapple with the lowest lending margins in Southeast Asia. Lenders in the city-state expanded credit by 17 percent last year on accelerated economic growth and increased loans to manufacturers and home buyers.

“They’re not breaking any records, but that both registered reasonable growth in the quarter in a relatively low growth environment is a good solid outcome,” Paul Dowling, a banking analyst at Sydney-based East & Partners, said by phone. “They’re also continuing to grow their fee-based and transactional businesses quite successfully.”

United Overseas Bank Ltd., the region’s third-largest lender, posted a 11 percent increase in net income to S$773 million, beating the S$656 million average of six estimates. The bank reported results after markets closed in Singapore.

Net income at OCBC climbed to S$715 million in the fourth quarter from S$663 million a year earlier, the bank said in a statement today. That beat the S$617 million average estimate of six analysts surveyed by Bloomberg.

Annual Profit

Shares of OCBC rose 0.5 percent and DBS fell 0.3 percent by the close of trading in Singapore. The benchmark Straits Times Index fell less than 0.1 percent. OCBC has slid 6.5 percent in the past 12 months while DBS has climbed 9.8 percent.

Full-year profit at DBS declined 4 percent to S$3.67 billion, while at OCBC it fell 31 percent to S$2.76 billion. In 2012, OCBC had a one-time gain of S$1.1 billion from the sale of stakes in Fraser & Neave Ltd., a Singapore-based drinks manufacturer, and its Asia Pacific Breweries Ltd. unit.

Net interest margin for DBS shrank to 1.61 percent in the fourth quarter from 1.62 percent a year earlier, today’s earnings report showed. That’s the 17th straight year-on-year decline. At OCBC, the measure contracted for the 18th straight quarter to 1.64 percent from 1.7 percent a year earlier.

Stable Margins

The net interest margin level was maintained through the year, meaning the measure has stabilized, OCBC Chief Executive Officer Samuel Tsien said at a media briefing today. He expects it to hover above the 1.6 percent mark this year.

“The reason for the good results to date has been loan volume growth,” said David Ross, a Bethesda, Maryland-based managing director of Chevy Chase Trust Co., which holds shares in OCBC. An expansion in net interest margin “is what will be needed as a catalyst to start moving the stocks upward.”

Singapore manages monetary policy through its currency rather than by setting its own interest rates, which advance or decline with global markets. The three-month Singapore interbank offered rate, used to price debt ranging from commercial loans to mortgages, averaged 0.38 percent in the past year, compared with a record low of 0.34 percent set in September 2011.

Lending Income

DBS’s net interest income, the difference between what is earned on loans and paid on deposits, climbed 12 percent in the quarter from a year earlier to S$1.45 billion. OCBC’s increased by the same proportion to S$1.03 billion.

Non-interest income at DBS rose 4.6 percent to S$697 million, led by investment banking and wealth management. At OCBC, a lower profit contribution from its Great Eastern Holdings Ltd. insurance subsidiary pared non-interest income by 10 percent to S$679 million.

Singapore’s economy expanded 4.4 percent in the fourth quarter from a year earlier, capping a year in which its growth accelerated to 3.7 percent, compared with 1.3 percent in 2012, government data show. Growth is expected to slow to 3.4 percent in 2014, according to International Monetary Fund forecasts.

OCBC’s Tsien aims to expand in China, Indonesia and Malaysia in search of higher growth, he said today. The bank is in exclusive talks with the majority shareholders of Hong Kong’s Wing Hang Bank Ltd. until March 3 to purchase the lender. Tsien declined to comment on the transaction.

Hong Kong offers a gateway into mainland China and an opportunity to tap the country’s efforts to increase the global use of the yuan. In 2013, OCBC derived 41 percent of its pretax profit from outside Singapore, according to its financial statement. For DBS, pretax profit from overseas was 35 percent.

Digital Banking

DBS Chief Executive Officer Piyush Gupta’s efforts at expanding abroad suffered a setback in July when he dropped a $6.5 billion offer for PT Bank Danamon Indonesia after failing to win regulatory approval for a majority stake.

To build the bank’s business in markets such as Indonesia, China and India without being “brick and mortar,” DBS is investing S$200 million over the next three years to create digital banking capabilities, Gupta said today.

“If the change that we’re seeing around us is indeed a pervasive secular change, then maybe we can use a digital agenda to get into businesses in these markets that you might not have been able to otherwise,” he said at a press briefing. It “may be another way of skinning that cat.”

Property Prices

There will probably be a 10 percent to 15 percent reduction in property prices in Singapore this year, DBS’s Gupta added. Stress tests on DBS’s mortgage portfolio show it can withstand a drop of as much as 30 percent, he said.

Fourth-quarter home prices in Singapore slid for the first time in almost two years, trimming annual gains to the smallest since 2008 as government curbs cooled values in Asia’s second- most expensive housing market.

UOB’s net interest margin shrank to 1.74 percent from 1.76 percent a year earlier, the Singapore-based bank said in a statement. Net interest income gained 13 percent, while fees and commissions climbed 12 percent.

Shares of UOB dropped 0.4 percent before the earnings were announced today.

--Editors: Russell Ward, Linus Chua