DBS Profit Sinks as Bank Tries to Put Bad Loans Behind It

(Bloomberg) -- DBS Group Holdings Ltd. Chief Executive Officer Piyush Gupta was determined to put the pain of soured energy-industry loans behind him -- even if it meant profit missing the lowest analyst estimate by a wide margin.

Southeast Asia’s largest bank on Monday said it boosted bad-loan allowances more than sixfold in the third quarter, resulting in a 23 percent drop in net income to S$822 million ($602 million).

The move “will enable investors to return their focus to our operating performance and digital agenda,” Gupta said in a statement. “I can say with high confidence that we’ve cleaned the book,” he said later at a news briefing.

Investors weren’t so convinced, sending the shares down the most in five weeks. Singapore banks have been struggling with rising provisions against the troubled regional oil and gas sector since Swiber Holdings Ltd. filed for judicial management last year. Oversea-Chinese Banking Corp. and United Overseas Bank Ltd. said in their quarterly reports that the energy-services industry remains under stress.

The result will mean “near-term negative share-price reaction,” said Kevin Kwek, an analyst at Sanford C. Bernstein. Still, he added that over the longer term shareholders may welcome DBS’s decision to deal resolutely with the bad-loan issue. “Upfront recognition of remaining asset quality strains will be preferred over stretching it out,” Kwek said.

‘Aggressive Stance’

Standard Life Aberdeen Plc, which holds DBS shares, appreciated the move to boost provisions.

“Always happy with an aggressive stance,” Hugh Young, the investment company’s Asia head, said in an email. The bank “can always write back later if it proves too aggressive.”

Shares of DBS fell as much as 1.6 percent, the biggest intraday decline since Sept. 29. They traded down 1.2 percent at 12:27 p.m. local time, paring this year’s gain to 31 percent.

DBS was the last of Singapore’s big banks to report earnings and the only one to miss projections. Third-quarter net income of S$822 million was well below the S$1.14 billion average of analyst estimates surveyed by Bloomberg. The lowest of those forecasts was S$1.05 billion.

Allowances for bad assets swelled to S$1.66 billion from S$261 million in the year-earlier period. The net amount was S$815 million after the bank took S$850 million out of its provisions for general loans.

Loan Defaults

Several local companies in the energy services sector have either defaulted on loan repayments or sought debt restructuring after a prolonged weakness in oil prices. The problems have been exacerbated by falling collateral values for oil vessels.

DBS continued to boost income from wealth management, partly a result of its purchase of retail and wealth assets from Australia & New Zealand Banking Group Ltd. in five Asian markets, announced last year. Net fee income rose 12 percent from a year earlier, led by growth in wealth management and investment banking fees, it said.

Other key figures from DBS’s results (year-on-year unless stated):

  • Net interest income gained 9 percent to S$1.98 billion
  • Net fee and commission income advanced 12 percent to S$685 million
  • Customer loans gained 8 percent to S$314 billion
  • Nonperforming assets rose 26 percent from the previous quarter to S$6.1 billion
  • Nonperforming-loan ratio stood at 1.7 percent from 1.5 percent in June
  • Net interest margin was 1.73 percent versus 1.74 percent in June
  • Including one-time integration costs for ANZ, net profit dropped 25 percent to S$802 million

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