DBS Group Holdings Ltd.'s earnings may get a boost this year from the possible unwinding of allowances set aside in 2020 in anticipation of higher bad loans due to the COVID-19 pandemic, which may prove less of a drag than previously feared.
Southeast Asia's biggest bank by assets posted a 72% year-over-year increase in net profit for the quarter ended March 31, helped by a write-back of S$190 million of general allowance from last year. That, coupled with a 15% year over year rise in net fee and commission income, allowed DBS to post a net profit of S$2.01 billion in the first three months of 2021, its highest quarterly earning on record.
"Based on the guidance from DBS management, we might even see an upside from the reversal of the over-provision of delinquencies, which is a positive," said Terence Chua, senior research analyst at Phillip Securities Research. "The general allowance is below our expectations and the write-backs slightly ahead of our expectations."
The entire amount clawed back was from the bank's model-driven allowances, after borrowers either paid back their loans or experienced an improvement in their finances, DBS Group CEO Piyush Gupta said on a call with reporters April 30. A bigger chunk of S$1.3 billion set aside as "management overlay" was left untouched to account for any further risks to asset quality from the pandemic, which continues to rage in some countries where DBS operates.
DBS has grown out of Singapore's small, though high-value market into other growth regions across Asia. The bank has substantial operations in Hong Kong and became the biggest foreign bank in India following its acquisition of Lakshmi Vilas Bank Ltd. in 2020. In April, its unit DBS Bank Ltd. agreed to acquire a 13% stake in Shenzhen Rural Commercial Bank Corp. Ltd., making it the largest shareholder of the Chinese bank and allowing it to tap the economic growth in the Greater Bay Area. Back home, the Singapore economy may experience an "above-trend pace of growth" this year, according to the central bank's April 14 monetary policy statement.
Asset quality
The evolution in asset quality in 2021 will depend on the overall macroeconomic conditions and outlook, though the bank's asset quality improvement was better than expected, Chua said. Specific provisions are largely in line with that of pre-COVID-19 levels, indicating underlying strong asset quality, Chua added.
DBS set aside S$10 million in allowances for credit and other losses in the first quarter, down 99% from S$1.09 billion in the same period of 2020, when it adopted a cautious stance and front-loaded provisions to build buffers against potential bad loans due to the pandemic.
"We've actually not had to dip into the extra reserves we kept aside," CEO Gupta said, adding that the bank let the allowances under the management overlay category stay untouched "because we think it might be too premature to start writing that back before we know what is happening."
Andrea Choong, equity research analyst at CGS-CIMB, said: "From an income statement perspective, this leaves room for the bank to release up to S$1 billion in management overlays over time — an earnings boost to come."
DBS CFO Chng Sok Hui said that the bank's S$4.13 billion allowance exceeded the tier 2 capital, or required reserves, by S$1.3 billion, which "acts as a buffer for the total capital adequacy ratio."
The bank's common equity Tier 1 capital adequacy ratio at the end of the first quarter clocked in at 14.3%, up from 13.9% in the prior quarter and prior year. Its nonperforming loan ratio for the quarter fell to 1.5% from 1.6% in the previous quarter and prior-year quarter.
The Singapore bank's net interest margin was flat compared with the previous three months at 1.49%, though it was significantly lower than 1.86% a year earlier. DBS expects net interest margin to range between 1.45% and 1.50% in 2021, Gupta said.
CGS-CIMB's Choong said NIMs have largely stabilized, but there could be some more "retracement" in net interest income, or NII, despite the higher loan growth. NII contracted 15% on the year to S$2.11 billion in the first quarter.
"There could be slightly more compression to come over the quarters, but not to the quantum seen over 2020 as downside on benchmark rates is limited," Choong said, noting that interest rates are already near zero. "We expect meaningful NII growth to come only when benchmark rates rise again."
As of April 29, US$1 was equivalent to S$1.33 and 6.47 Chinese yuan.
