Published October 24, 2008

DBS shares hit by prospect of payout

By CONRAD TAN

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(SINGAPORE) DBS Group's shares plunged for a third day yesterday to their lowest in more than five years, after the bank said that it expects to spend up to $80 million compensating customers who bought structured products linked to bankrupt Lehman Brothers.

The stock slumped 5.3 per cent to $10.98 - its lowest closing level since Aug 6, 2003 - after falling as much as 7.8 per cent earlier in the day. The slide extended its three-day loss to 15.8 per cent, on worries that its profits will be hurt by cash payouts to customers who lost money on the products.

The bank said on Wednesday night that it expects to pay a total of $70-80 million, based on cases that it has reviewed so far.

Its shares have plunged 34.6 per cent so far this month, exceeding the 26 per cent loss in the Straits Times Index.

DBS has been a target of unhappy investors after Lehman filed for bankruptcy in the US on Sept 15, triggering a default in structured investment products sold by DBS and other financial institutions including Hong Leong Finance and Maybank. Angry investors claim that they were misled by bank staff into believing that the investments were low-risk.

'We have found that a number of cases did not meet the standards DBS upholds,' DBS said in a Wednesday statement. It added that it will start compensating such customers immediately.

The bank said that it had sold $360 million of the products to 4,700 customers in Singapore and Hong Kong.

Leng Seng Choon, an analyst at DMG & Partners Securities, said that the cash payouts will reduce DBS's full-year net profit. He also slashed his forecast for the group's profit next year by 27 per cent to $1.83 billion, saying that provisions for losses on bad loans are likely to rise, while fee and commission income growth will slow. 'DBS's aggressive loan expansion over the past three to four years and its dependence on non-interest income are negatives in this current environment,' he said.

Morgan Stanley analysts Matthew Wilson and Samantha Horton said in a report that the amounts involved in the compensation for customers are 'immaterial to DBS financials'. But they expressed concern about the damage done to the bank's reputation, and possible restrictions on its retail business by regulators in Singapore and Hong Kong in future.

Shares of United Overseas Bank (UOB) and OCBC Bank also fell yesterday, on concerns over the worsening economic outlook. UOB ended 5 per cent down at $13.80, while OCBC fell 6.9 per cent to $5.49. UOB has lost 17.9 per cent so far this month, while OCBC is down 23.4 per cent.

Earlier this week, BNP Paribas analyst Ng Wee Siang cut his price targets for all three Singapore-listed banks, citing likely damage to their earnings from the weakening economy.

Hong Leong Finance, which said on Wednesday that it will buy back Lehman-linked notes from elderly customers with no more than a primary school education, saw its share price jump 7.2 per cent to end at $2.22 yesterday.