DBS clouds bank report season
Tough operating climate that cut profits at HK arm 29pc to $1.38b may have hurt other local lenders
The Hong Kong arm of Singapore-based lender, DBS, kicked off the local bank reporting season yesterday not with a bang but a whimper, unveiling a troubling 29 per cent fall in operating profit to $1.38 billion.
The outcome casts a shadow over the results of local banks to follow, with Hong Kong's biggest lender, HSBC, and its 62.2 per cent owned subsidiary, Hang Seng Bank, due to report their results on Monday, followed by Bank of East Asia on Wednesday.
Behind the poor operating performance unveiled by DBS (Hong Kong) were sharply narrower lending margins, as a rise in funding costs from increases in the Hong Kong interbank offered rate (Hibor) outstripped slower rises in its prime lending rate, said management.
In their research reports prior to the reporting season, analysts warned that narrower spreads would eat into banks' interest earnings and DBS (HK) confirmed as much, reporting an 8 per cent fall in net interest income in the first half versus the same period last year.
There were some signs that the pressure on margins might have begun easing as the period ended, however, since net interest income in the second quarter was down more modestly by 5 per cent to $1.03 billion.
DBS (HK) chief executive Randolph Sullivan noted that the prime-Hibor spread averaged 4.9 per cent last year and 3.9 per cent in the first half of this year. Net interest margin fell about 30 basis points in the first half, but widened by seven basis points to 2.05 per cent in the second quarter, he said.
Frank Wong, vice-chairman of parent DBS Group Holdings - which posted a 36 per cent drop in net profit to S$853 million in the first half - said he expected margin pressure in the Hong Kong unit to ease further in the second half.
'You will see the trend that more banks will now increase their prime rate much faster than they had in the past. This is an indication that they want to protect their margins, from the action that we have seen,' he said. Net profit for the DBS Hong Kong operations was down 23 per cent to $1.12 billion. Mr Wong said he expected that the US Federal Fund rate would increase to 4 per cent this year, and Hong Kong rates would follow suit.
Meanwhile, non-interest income in the Hong Kong operation fell 28 per cent in the first half and 25 per cent in second quarter to S$80 million, mainly due to mark-to-market losses on derivatives that do not qualify as hedges under new Singapore accounting rules, and a drop in income from sales of treasury investment products.
On the question of whether DBS intends to take a stake in Guangdong Development Bank, vice-chairman and group chief executive Jackson Tai declined to comment.
He said that the group had responsibility to look at options to create value for shareholders, but added that the group could also grow organically. DBS remained optimistic about the potential of the mainland market.
