• Growth momentum driven mainly by Singapore operations but slowdown in second half likely to persist into 2021
• Acquisition and merger of LVB into DBS India will have longer term impact
• New platforms of growth will take time to deliver, but retail wealth management has shown results

DBS Group announced net profit of SGD 4.72 billion ($3.5 billion) for full-year 2020, 26% below the previous year’s record performance. Profit before allowances rose 2% to SGD 8.43 billion ($6.3 billion). Total income was flat at SGD 14.6 billion ($11 billion) in spite of the disruption from COVID-19.

It set aside four times more total allowances of SGD 3.07 billion ($2.3 billion) than the previous year while general allowances stood at SGD 1.71 billion ($1.2 billion) in anticipation of potential risks from the pandemic.

Net profit in the fourth quarter fell 33% from a year ago to SGD 1.01 billion ($761.9 million) due to lower net interest margin, which hit a historical low of 1.49% and higher total allowances.

Growth in loans for the year was 4%, mainly from non-trade corporate loans, mortgages in Singapore and newly acquired Lakshmi Vilas Bank (LVB) in India.

Speaking at the results media briefing, group chief financial officer, Chng Sok Hui, remarked that loans grew SGD 16 billion ($12.1 billion) over the course of the year to SGD 371 billion ($279.9 billion). Non-trade corporate loans grew SGD 19 billion ($14.3 billion) led by drawdowns in Singapore and Hong Kong. Trade loans fell SGD 6 billion ($4.5 billion) as tighter pricing made them less attractive to roll-over and as transaction values fell from lower oil prices. Consumer loans were stable. Housing loans were little changed as declines in the second and third quarters due partly to the circuit-breaker were offset by a recovery in the fourth quarter. Nevertheless, nonperforming loan ration ended the year just marginally higher than 2019 at 1.6%

Five billion Singapore dollars ($3.7 billion) or slightly more than a quarter of non-trade corporate loan growth was associated with Singapore’s credit relief programmes where the government provides a 90% risk share.

Growth momentum driven mainly by Singapore operations but slowdown in second half likely to persist into 2021

Loan growth slowed in the second half, up SGD 4 billion ($3 billion), or one-third of the SGD 12 billion ($9 billion) recorded in the first half of the year. It grew just 1% in the last quarter as compared to the first half which was boosted by short-term borrowing from corporates due to financial market dislocations in February to April. Some of this borrowing was repaid in the second half, which offset continued drawdowns of longer-term loans.

However, group CEO Piyush Gupta observed that underlying growth momentum in the second half was sustained. On loans, growth for the first quarter in 2021 is likely to come in at around 2% higher than the 1% to 1.5% that it had guided for. “It remains to be seen whether this will continue through the year but it gives me confidence that we will meet the mid-single digit loan growth we were targeting,” he added.

Given that a substantial portion of new assets is backed by the government and still under moratorium, and with asset quality still kept relatively well managed, one may question the need to increase total allowance by four times unless conditions are expected to worsen further into 2021 despite the somewhat sanguine guidance.

DBS’ performance continues to be driven mainly by its Singapore operations, which contributed to slightly over 64% of operating income but over 70% of net profit before tax in the year. Hence, its proactive search for new sources of growth.

In comparison, its local peer OCBC derived 61% of operating income and just 55% of net profit from Singapore, while the city state's contribution to UOB's operating income and net profit was even lower at 52% and 56% respectively.

OCBC recorded full year net profit of SGD 3.59 billion ($2.67 billion) also 26% lower than the previous year's record earnings, while UOB's net profit fell 33% to SGD 2.91 billion ($2.17 billion) as NIM narrowed to 1.56% and 1.57% respectively.

Acquisition and merger of LVB into DBS India will have longer term impact

The acquisition and merger of LVB into DBS India is identified as one of the bank’s new platforms for growth. The SGD 463 million ($349.2 million) of capital injection is unlikely to have a material impact on the immediate financial performance of the group. Chng said that DBS India is currently profitable. In fact, net income grew 44% in 2020, with its existing corporate and wholesale heavy asset and liability mix. With the amalgamation of LVB, the balance sheet becomes more diversified and balanced. She expects the combined entity to become profitable in the next 12 to 24 months.

 Gupta highlighted that the addition of LVB will help performance in the longer term, “The amalgamation of LVB has given us two million retail customers and 125,000 SME (small and medium sized enterprise) customers, which improves our customer footprint. This is a good customer base to leverage off and adds a layer to what we have built digitally. Our organic expansion with the wholesale subsidiary proved to be helpful and has been profitable since the first year”.

LVB was fully amalgamated under Section 45 of India’s Banking Regulation Act which gives DBS full control of the bank as part of DBS India which is classified as a local bank since its subsidiarisation.

Prior to amalgamation, DBS India was primarily wholesale funded, with the retail deposit base at only 23%. With LVB, DBS India’s retail funding base is now close to 50%, which Gupta believes will make a big difference to its capacity to grow the domestic India business.

“We are thus optimistic and are fairly confident that this will be profitable within 12 to 24 months and I think it will be ROE (return on equity) accretive within two to three years, which is the normal timeframe for acquisitions to become profitable,” he said.

According to Gupta, LVB should generate SGD 150 million ($113.1 million) in income with about SGD 120 million ($90.5 million) in expenses on a business as usual basis. It had a SGD 2 billion ($1.5 billion) loan portfolio of which SGD 800 million ($603.5 million) were gold backed loans, small when compared to the group’s SGD 370 billion ($279.1 billion) loan book. DBS has also been aggressive in recognising NPAs (nonperforming assets) and taking provisions upfront, so it claims the impact on credit costs going forward should be limited. LVB will help to grow the secured SME and the secured retail businesses as well as expand the wealth franchise linked to Singapore.

“The $150 million of goodwill is not a large amount to pay for a franchise that fundamentally changes the texture of our India business,” said Gupta.

New platforms of growth will take time to deliver, but retail wealth management has shown results

The bank also identified its securities joint venture in China, as well as initiatives in digital exchange, supply chain digitalisation and efforts to broaden wealth management to the mass market as new growth platforms that will strengthen its ability to support customers and deliver shareholder returns.

On its majority owned DBS Securities (China) joint venture with Donghao Lansheng Investment Management, Shanghai Huangpu Investment Holdings, Shanghai Huiyang Asset Management Company and Shanghai Huangpu Guidance Fund Equity Investment, Gupta expects to get final approval from regulators in the next couple of months.

“Our timing is perfect because as China’s capital markets liberalise with the establishment of both the Stock Connect and Bond Connect, and coupled with trade internationalisation, business volumes will grow rapidly. We are already observing this in our investor business, our custody business as well as our International Energy Exchange business. We would be able to bring to market both cross-border and onshore deals.”

He added, “My view is that the opening up of China’s capital account is going have a big impact over the next decade, which will be more significant than its ascension to the World Trade Organization in 2002. China’s capital market is tiny as a proportion of its GDP, and its weight in global economic affairs is relatively small despite the size of its economy. This is definitely on the cusp of changing. So, building up our capabilities such as with the securities joint venture is going to be a significant growth driver”.

The bank’s digital exchange initiative with Singapore Exchange went live in December 2020. While it is still early days, it reported daily volumes of around 300 to 400 trades in four cryptocurrencies and four fiat currencies. Currently, it only onboards private banking customers.

“We are cautious because we want to make sure our compliance protocols are sound. We are also using this time to conduct due diligence on the coins we are offering. It is looking good so far and there is potential to scale this up over time given the interest in tokenised assets, which will provide meaningful contribution to our revenues,” Gupta commented.

However, the bank’s retail wealth management business has made good progress. Wealth management related fees grew 21% year on year from buoyant sentiment in the low-rate environment as well as continuing uncertainty and volatility in the financial markets that have boosted trading activities.

Gupta added that the bank’s recent open banking initiative has also added momentum to the growth, “A lot more people are now participating in equity markets and we are trying to encourage that by making our platforms more accessible. But we are also mindful about doing this sensibly by making sure that there is good research content to aid in financial literacy rather than encourage retail speculation”.

Lastly, the pandemic has renewed companies’ focus on digitalisation, especially regarding supply chains. The bank has been able to facilitate the shift through its digital solutions such as Rapid which utilises its API capabilities. It has increased participation over the past couple of quarter, and seen volume growth in payments, collections and trade finance on the back of the supply chain digitalisation effort.

The bank had also previously announced that it will up its green and sustainability finance target for 2024 to SGD 50 billion ($37.7 billion). Since 2018, DBS has concluded over 100 sustainable financing deals worth about SGD 17 billion ($12. 8 billion). Its sustainable and green financing transactions in 2020 include a $1.11 billion dual-tranche green project bond by Star Energy Geothermal, PSA Marine’s three-year EUR 30 million ($36.3 million) sustainability-linked loan and a EUR 500 million ($605.9 million) Korea Housing Finance Corporation COVID-19 social bond.