DBS suffers $5.3b goodwill charge on HK operation

PUBLISHED : Saturday, 18 February, 2006, 12:00am
UPDATED : Saturday, 18 February, 2006, 12:00am

Singapore's DBS Group Holdings has suffered a sharp decline in net profit because of a substantial goodwill charge on its Hong Kong operation required under new Singapore financial reporting standards.

The charge on DBS Bank (Hong Kong), which incorporates the former Dao Heng Bank in its operations, was S$1.13 billion ($5.37 billion), which dragged the group's full-year net profit to S$824 million - a 59 per cent decline from the S$1.99 billion posted in 2004.

But group vice-chairman and chief executive Jackson Tai denied that the goodwill charge showed that it had paid too much in the $42.6 billion Dao Heng takeover in 2001, which represented 3.18 times book value.

While analysts believed that deal was too expensive, Mr Tai said the group had no regrets about the takeover.

'We are very pleased to have what we have ... I can't imagine what DBS [Group] would be without DBS (Hong Kong),' he said during a video press conference yesterday.

DBS Bank (Hong Kong) had an estimated recoverable value of S$9.63 billion, against a carrying value of about S$10.76 billion.

Under Singapore Financial Reporting Standards, DBS had to assess the recoverable value of its investments against their carrying value on the company balance sheet.

Jeanette Wong, chief financial officer of DBS Bank, said the recoverable value was calculated based on a discounted cash-flow method with a compounded annual growth rate of 8.7 per cent from this year to 2010.

The calculation also involved a 4.5 per cent long-term growth rate from 2011 and a discount rate of 9.5 per cent, Ms Wong added.

A spokeswoman said the drop in earnings last year had affected the discounted cash flow and the high interest-rate environment had affected the discount rate.

Mr Tai stressed that the goodwill charge, which was an ongoing market exercise, would not affect the group's operation.

But the group's net profit before goodwill charges dropped 20 per cent to S$1.95 billion last year, even though the group had recorded a one-off gain of S$303 million from a disposal of Singapore office buildings. While there was a 9 per cent increase in net interest income to S$2.94 billion, the 26 per cent drop in non-interest income to S$1.69 billion and a provision of S$203 million dragged down profit before goodwill charges. Provision in 2004 was only S$63 million.

Its net interest margin in the fourth quarter last year was 2.06 per cent, compared with the 1.92 per cent in the third quarter and an average of 1.91 per cent for the full year.

The net profit of DBS Bank (Hong Kong) fell 18 per cent to S$481 million for last year.

Randolph Sullivan, chief executive at DBS (Hong Kong), said he was optimistic about Hong Kong's prime-Hibor spread, which stood at about 3.9 per cent, because of the strong capital flow and market liquidity.

On DBS's China expansion, Mr Tai said it was waiting for approval to open its fifth mainland branch in Suzhou. DBS has branches in Beijing, Shanghai, Guangzhou and Shenzhen.

Frank Wong, group chief operating officer, said it was in talks with a mainland party in forming a joint venture. 'We hope to be able to announce something some time this year,' he said.

Mr Wong said that he believed that the yuan and debt-capital markets would be liberalised in one to two years.

The group's non-performing loan rate was 2.1 per cent last year, compared with the 2.5 per cent in the previous year.