Below expectations. 3Q08 core net profit of S$402m came in below our
expectations (S$506m) and below consensus (S$475m). The disappointments
emanated from trading losses and larger-than-expected allowances, though results
were weak all round. 9M08 earnings were 70% of our FY08 estimate.
• Both NII and non-NII were weaker than expected. Loans, driven by the building &
construction and manufacturing segments, surged 7.7% qoq, faster than peers. At
this stage of the cycle, this is not necessarily a good thing. NIM, however, slipped
5bp to 1.99% on a combination of narrower prime-HIBOR spreads and shortened
asset durations. On the non-NII side, net fee income shrank 8% qoq, on weaker
stockbroking and wealth management fees but the biggest dislocation came from
trading losses (3Q: -S$13m, 2Q: S$137m). These included losses related to the
unwinding of Lehman-exposed investment products. DBS included a S$70m charge
set aside for compensation to retail customers in this quarter. Trading income
actually included S$74m of gains from the reclassification of available-for-sale
trading assets, without which, the results would have looked uglier.
• Cost control in full force. The bank implemented steep cost controls in 3Q. Staff
costs fell 49% qoq on lower bonus accruals, shaving the 3Q cost ratio to 41.3%
from 42.5%, keeping 9M08 cost ratio stable. Cost efforts were insufficient to
compensate for the weak topline though. PPOP still fell 12% qoq.
• Most significant spike in allowances, of the three banks. The other major drag
was allowances, though not entirely surprising. Total loan-related allowances rose
to 74bp of loans. Loan-related specific provisions jumped to S$106m on charges for
Singapore, Hong Kong consumer (share financing) and Hong Kong SME loans.
There was a similar spike in investment-related specific provisions (S$84m) to
account for US/European financial institution debt securities. Gross provisions for
loans were not taken in the quarter but further gross provisions of S$129m were
taken to raise the coverage for corporate CDO investment to 25%, from 6% (2Q).
• Keeping earnings unchanged pending briefing, S$11.58 target price and
Underperform. We are likely to cut our FY08 earnings after the results briefing.
DBS’s 3Q results are the worst of the three local banks’ and this is likely to weigh on
its share price. We maintain our S$11.58 target price, based on 0.8x CY09 P/BV
and our Underperform rating.
Results comparison
FYE Dec (S$ m) 3QFY08 3QFY07 yoy % qoq % 3QFY08 3QFY07 yoy % Prev.
chg chg
expectations (S$506m) and below consensus (S$475m). The disappointments
emanated from trading losses and larger-than-expected allowances, though results
were weak all round. 9M08 earnings were 70% of our FY08 estimate.
• Both NII and non-NII were weaker than expected. Loans, driven by the building &
construction and manufacturing segments, surged 7.7% qoq, faster than peers. At
this stage of the cycle, this is not necessarily a good thing. NIM, however, slipped
5bp to 1.99% on a combination of narrower prime-HIBOR spreads and shortened
asset durations. On the non-NII side, net fee income shrank 8% qoq, on weaker
stockbroking and wealth management fees but the biggest dislocation came from
trading losses (3Q: -S$13m, 2Q: S$137m). These included losses related to the
unwinding of Lehman-exposed investment products. DBS included a S$70m charge
set aside for compensation to retail customers in this quarter. Trading income
actually included S$74m of gains from the reclassification of available-for-sale
trading assets, without which, the results would have looked uglier.
• Cost control in full force. The bank implemented steep cost controls in 3Q. Staff
costs fell 49% qoq on lower bonus accruals, shaving the 3Q cost ratio to 41.3%
from 42.5%, keeping 9M08 cost ratio stable. Cost efforts were insufficient to
compensate for the weak topline though. PPOP still fell 12% qoq.
• Most significant spike in allowances, of the three banks. The other major drag
was allowances, though not entirely surprising. Total loan-related allowances rose
to 74bp of loans. Loan-related specific provisions jumped to S$106m on charges for
Singapore, Hong Kong consumer (share financing) and Hong Kong SME loans.
There was a similar spike in investment-related specific provisions (S$84m) to
account for US/European financial institution debt securities. Gross provisions for
loans were not taken in the quarter but further gross provisions of S$129m were
taken to raise the coverage for corporate CDO investment to 25%, from 6% (2Q).
• Keeping earnings unchanged pending briefing, S$11.58 target price and
Underperform. We are likely to cut our FY08 earnings after the results briefing.
DBS’s 3Q results are the worst of the three local banks’ and this is likely to weigh on
its share price. We maintain our S$11.58 target price, based on 0.8x CY09 P/BV
and our Underperform rating.
Results comparison
FYE Dec (S$ m) 3QFY08 3QFY07 yoy % qoq % 3QFY08 3QFY07 yoy % Prev.
chg chg
