DBS Group Holdings Ltd. may be set for a stronger 2021 as it expects the recent business momentum to sustain with the economic recovery, after higher allowances and margin erosion caused a 33% year-over-year fall in its 2020 fourth-quarter net profit.
DBS, Southeast Asia's biggest bank by assets, reported S$1.01 billion in net profit for the last three months of 2020, from S$1.51 billion a year earlier. Net interest margin shrank to 1.49% in the fourth quarter, from 1.53% in the third and 1.86% in the fourth quarter of 2019. However, the pace of decline in NIM eased as interest rates stabilized, CFO Chng Sok Hui said during the company's earnings briefing on Feb. 10.
CEO Piyush Gupta noted that the bank's performance in January has been "quite strong" and will give the bank a "head start" for 2021. "You will probably see mid-single-digit loan growth this year," he said. "And deposit momentum continues. It's not continuing at the same rate as it was in the peak of last year, but it has continued about half that level. Still, we've got more money coming at us than we know what to do with."
Tay Wee Kuang, an analyst at Phillip Securities, told S&P Global Market Intelligence that he expects the bank's earnings to recover this year after DBS stepped up provisions in 2020. "With better clarity on asset quality, we are likely to see pre-COVID levels of credit costs in [2021], which will lift earnings despite similar income levels," he said.
DBS made allowances for credit and other losses of S$577 million in the fourth quarter, taking the total allowances to S$3.1 billion for the year. CEO Gupta said the total allowances in 2020 and 2021 are likely to be in the middle of the previously indicated S$3 billion to S$5 billion range.
"We'll get a better sense of it when those moratoriums expire," he said. "I'm certainly feeling more optimistic about the overall quality of the portfolio and asset conditions now than I was three or six months ago."
Tay said the bank's conservative stance for provisions will pay off over the next two years. "The front-loaded provisions will continue to provide assurance to investors that we are past the deep end for allowances, and are looking at reversion to a normalized credit cost environment as early as this financial year," he said.
Not out the woods
S&P Global Ratings said in a note after the earnings were announced that while the pace of provisioning slowed in the second half of last year, "we consider it is not out of the woods yet."
Ratings noted that 25%-50% of its small and midsize enterprise portfolio is still under moratorium. It also expects credit costs and nonperforming loans to remain elevated this year before recovering in 2022. DBS reported an NPL ratio of 1.6% in the fourth quarter, unchanged over the previous three months and higher than 1.5% in the fourth quarter of the previous year.
While the effects of the COVID-19 credit downturn may persist for another six months to a year, Ratings said it believes DBS "has enough financial resilience ... supported by the bank's leadership in Singapore, diversified regional presence, sound capital buffer and risk profie, as well as strong deposit funding base."
DBS expects its purchase of India's Lakshmi Vilas Bank Ltd. in November 2020 to help it grow in the key South Asian market, though the acquisition dragged on the company's result via elevated impairment provisions. Lakshmi Vilas Bank's impairments were absorbed by DBS, adding S$212 million in nonperforming assets, it said.
DBS expects Lakshmi Vilas Bank to be profitable within 12 to 24 months, CFO Chng said.
DBS announced a dividend of 18 Singapore cents per share in the fourth quarter, in line with the dividend cap called for by the Monetary Authority of Singapore. The bank has not had further conversations with the regulator regarding dividends for 2021, Gupta said.
As of Feb. 9, US$1 was equivalent to S$1.33.
