Published November 11, 2008

DBS troubles not over, say analysts

Despite a share price rise, investors are still unsure of impact of job cuts

By CONRAD TAN
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DBS Group Holdings' troubles could get worse in the coming months, although its battered share price may already reflect investors' fears of the rough ride ahead, banking analysts say.

Last Friday, DBS reported its worst quarterly performance since the end of 2005 and said it would fire 6% of its workforce.

Last Friday, DBS shocked investors and staff when it reported its worst quarterly performance since the end of 2005 and said that it would fire 6 per cent of its workforce by the end of the month, with most of the 900 job cuts in Singapore and Hong Kong, its two biggest markets.

Its share price rose yesterday, but investors and analysts remained unsure over the impact of the massive retrenchment on the bank's prospects.

'I think it will affect the mood of the group as well as the mood of Singapore,' said Phillip Securities analyst Brandon Ng after the job cuts were announced.

Workers here will now feel that the financial crisis is 'hitting closer and closer to home', he added.

One BT reader called the job cuts a 'short-term, short-sighted and knee-jerk reaction' and suggested that the bank instead reduce salaries across the group, including chief executive Richard Stanley himself, to save costs.

Mr Stanley, who joined the bank as chief executive in May, said last week that the job cuts were necessary to make DBS 'much leaner and more streamlined' and are unrelated to the bank's financial position or pressure from angry customers who lost money on structured products linked to bankrupt Lehman Brothers.

Kenneth Ng, an analyst at CIMB, said that the bank's results were 'quite a bit below expectations', mainly due to a slump in non-interest income and sharply higher provisions for bad loans.

Looking ahead, 'I don't think the environment's good for the banks, particularly for DBS', he added.

DBS shares ended 30 cents or 2.6 per cent higher at $11.70, after dipping 2.5 per cent earlier in the day.

Pauline Lee, an analyst at Kim Eng Securities, said that the group's results were a 'massive disappointment' and downgraded the stock to 'hold' from 'buy'.

DBS's third-quarter net profit fell 38 per cent to $379 million from a year earlier, hurt by large trading losses and a big increase in allowances for bad loans.

The sharp dive in profit meant that DBS earned less during the quarter than its rivals United Overseas Bank and OCBC Bank - which reported net profits of $475 million and $402 million respectively.

That's unusual, because 'they're supposed to be the biggest among the three', said Ms Lee.

Citigroup analysts Robert Kong and Ivan Lim cut their target price for DBS shares to $9.50 from $12.15 and kept their 'sell' rating on the stock.

DBS's results were 'a bad miss', they said in a report.

And things could get worse as the economy heads south.

'Net interest income was stable but we view that weak margins will narrow further,' they added.

Leng Seng Choon, an analyst at DMG & Partners Securities, said in a report yesterday that 'while asset quality is high, we believe deterioration will take place over the next few quarters'.

He kept his target price of $11.30 for the stock and his 'neutral' call unchanged.

Still, some analysts believe that DBS's share price, which has tumbled more than 30 per cent since the end of September, may already reflect investors' worries about the difficulties faced by the bank.

'While we anticipate weaker earnings ahead, we believe current valuations may have already priced this in, partially,' said Macquarie analysts Tay Chin Seng and Jay Mok in a report.

They kept their 'outperform' rating on the stock.

Of the 13 analyst recommendations compiled by Bloomberg since Friday, five were 'underperform', 'sell' or 'underweight' calls; four were 'hold' or 'neutral' ratings; and four were 'buy' or 'outperform' calls.

Two downgraded their ratings on the stock after the results - one to 'hold' from 'buy' and another to 'underperform' from 'outperform' - while a third upgraded his call to a 'buy' from 'hold'.

The rest kept their recommendations unchanged.