The Hong Kong operations of DBS Group Holdings, Singapore's largest bank, posted a 36 per cent increase in interim net profit despite booking a one-time goodwill impairment charge and expenses related to compensation over products linked to Lehman Brothers. Net profit in the first six months rose to HK$1.36 billion from HK$1 billion a year earlier. However, earnings for the second quarter plunged 31 per cent year on year, owing to a 72 per cent increase in expenses from the previous quarter after an agreement with the Securities and Futures Commission and the Hong Kong Monetary Authority to pay out HK$651 million to customers of high-risk constellation notes earlier this month. The bank said it had no firm forecast for any further expenses related to the remainder of the cases, and it would continue to approach each customer on a case-by-case basis. DBS also booked a goodwill impairment charge of S$1.02 billion (HK$5.81 billion) for its Hong Kong operations, attributing the decision to 'noticeable and persistent strains' in wholesale funding markets that meant interest margins would continue to fall. Group chief executive Piyush Gupta said the writedown put the bank's Hong Kong assets at 2.2 times book value, compared with an average of 2 times among Hong Kong banks. 'The dollar market is extremely tight, and there is very aggressive pricing for deposits in Hong Kong,' he said. 'But this does not mean we have a bearish view of Hong Kong.' Amy Yip, chief executive of DBS Bank (Hong Kong), said the reduction in book value was necessary because the bank predicted that its cash flow position over the next five years 'is not as good as we had assumed'. The goodwill cannot be written up again later even if the carrying value of the book increases. 'Loan margins have not expanded but the cost of funding has,' Yip said, pointing out that competition was so intense that some banks were offering deposit rates of up to Hibor plus 100 basis points. Net interest income in the first six months fell 4 per cent from the year before to HK$2.22 billion as low interest rates continued to weigh on net interest margins, but non-interest income soared 44 per cent to HK$1.84 billion on the back of strong loan syndication and sales of treasury and wealth management products. The bank said pressures on margins were somewhat offset by strong loan growth, mainly driven by corporate demand and residential mortgages. Its market share in Hong Kong for loans increased 0.2 points from the previous quarter to 5.6 per cent. Overall net profit for the group fell to S$300 million in the second quarter owing to the goodwill impairment charge. Stripping out the one-time charge, earnings grew 30 per cent year on year to S$718 million.