DBS Group Holdings Ltd. will bank on rising margins as it prepares for uncertainty due to higher rates in the coming months after the Singapore-headquartered lender reported a record-high net profit in the third quarter.
The biggest lender in Southeast Asia by assets logged a third-quarter net profit of S$2.24 billion, or S$3.41 per share, up 32% year over year as its net interest margin returned to pre-pandemic levels. NIM went up 32 basis points to 1.90% in the July-to-September quarter, from 1.58% in the previous three months. The bank's NIM stood at 1.43% in the third quarter of 2021.
"This is actually a blended number, which includes a much stronger growth in the commercial book, but some drag on the treasury book [NIM]. This also reflects the fact that the cost of funding in deposits at the margin is going up more rapidly as you go forward," said DBS CEO Piyush Gupta during a Nov. 3 earnings call.
The Monetary Authority of Singapore was among the first central banks in Asia to have tightened monetary policy as early as October 2021 as inflationary pressures emerged after two years of pandemic-induced economic slowdown. Last month, the MAS conducted its fourth policy-tightening move of the current cycle as global central banks continue to raise rates to tamp decades-high inflation. The U.S. Federal Reserve announced its fourth 75-basis-point hike of the year on Wednesday, though it signaled that future hikes may be less steep.
"I do expect the inflation level rates to start leveling off partly from base effect in the coming quarter," Gupta said. DBS expects NIM to reach around 2.25% by mid-2023.
Looming risks
The bank's growth might be affected by looming risks such as a possible recession in the U.S. and a slowdown in Asia, Gupta added. "Our guidance has been predicated on that there is a lot of uncertainty with these high interest rates. We haven't seen this environment in a long period of time."
Analysts expect DBS' core Singapore loan portfolio to remain healthy but flagged the risk that higher interest rates could tighten spreads as funding costs increase.
"DBS' profitability will benefit from rising interest rates as the bank reprices loans upward. We expect its return on assets to improve to 1.0% to 1.2% as expansion in interest margins accelerates following multiple rate hikes," said Ivan Tan, a Singapore-based banking analyst at S&P Global Ratings.
DBS also has sizable exposure to Greater China, which faces headwinds from a property downturn and strict COVID-19 curbs, Tan noted.
"Macroeconomic challenges from globally high inflation and the accompanying central bank response could weigh on asset quality. However, we still expect DBS to maintain overall resilience in asset quality," Tan said.
Loans grew 6% year over year owing to higher nontrade corporate and consumer loans. Nontrade corporate loans grew S$8 billion, while housing loans also picked up by S$1 billion. Growth in nontrade corporate loans and mortgages was faster than in the first two quarters, said Gupta.
The third quarter still saw sizable loan growth for DBS, but "having said that, we expect slower economic conditions to dampen loan demand going into 2023," said Thilan Wickramasinghe, Singapore head of research at Maybank Investment Banking Group.
As of Nov. 2, US$1 was equivalent to S$1.41.
