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Singapore's DBS expects asset quality to stay resilient after record profit

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Singapore's DBS expects asset quality to stay resilient after record profit

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A DBS Bank building in Singapore.
Source: DBS Bank

DBS Group Holdings Ltd. expects its asset quality to remain strong with stable provisions against potential bad loans after the biggest lender in Southeast Asia by assets reported its highest-ever annual net profit.

Net profit in the fourth quarter of 2021 rose 37% year-over-year to S$1.39 billion, taking full-year earnings to S$6.80 billion, or 44% higher than in the previous year, DBS said in a Feb. 14 stock exchange announcement. Net interest margin for the quarter was 1.43%, unchanged from the previous three months. That may indicate that the lender's NIM has stabilized after falling steadily since 2020 amid monetary easing by global central banks to counter the drag induced by the COVID-19 pandemic.

"Credit output continues to be very good, asset quality is resilient," DBS CEO Piyush Gupta said on a post-earnings call with reporters, adding that total allowances in 2022 are expected to remain around the same levels as in 2021.

The bank's full-year profit was buoyed by a 9% growth in loans, the highest since 2014. Wealth management income rose 19% and transaction banking services saw 13% growth.

"I would expect that these metrics would continue to grow this year as the environment improves," said Glenn Thum, a Singapore-based analyst with Phillip Securities Research. DBS expects its loans to grow in the 6%-7% range this year.

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Monetary policy

Banks in Asia-Pacific face varying speeds of monetary policy normalization this year. While the U.S. is preparing for rates to lift off as inflation rises, China has continued to ease, including a cut to borrowing costs on Jan. 20 to revive slowing loan growth. The Reserve Bank of India last week stood pat, asking banks to step up lending to fuel economic recovery. Singapore's central bank unexpectedly tightened its monetary policy settings in January, citing elevated inflationary pressures. Higher rates can boost banks' NIMs, but also carry the risks to pockets of the economy that are counting on cheap finance to recover from the pandemic.

DBS remains cautious on its small and medium-sized enterprises portfolio should inflation take a very sharp upturn, although it represents a small book compared with its corporate, consumer and mortgage books. "In the last few years with the COVID, frankly, most banks have been very focused on making sure that book is tightly managed," Gupta said.

The bank expects overall business momentum to remain "healthy" even as economic recovery from the pandemic settles into a more moderate pace. Gupta, however, flagged risks from a possible U.S. market sell-off and slower-than-expected Chinese economic growth.

"We think it reasonable to believe that loan growth could moderate slightly this year given its Greater China focus," said Andrea Choong, a Singapore-based equity research analyst at CGS-CIMB Securities.

DBS's net interest income fell 7% year-over-year in 2021 as a 17-basis-point decline in NIM more than offset the impact of interest-bearing asset growth. The lender's nonperforming loan ratio improved to 1.3% as of Dec. 31, 2021, compared with 1.5% a year earlier.

Capital provisions

DBS said it has set aside S$930 million as additional capital after the Monetary Authority of Singapore on Feb. 7 ordered the lender to up its reserve following disruptions to online services for two days in November 2021. The bank said the incident was caused by a "malfunctioning" access control server and that it has taken remedial actions.

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As of Feb. 11, US$1 was equivalent to S$1.34.