Published December 23, 2008

DBS warns of lower Q4 net earnings

Net profit before one-time charges could be moderately lower than in Q3

By CONRAD TAN
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DBS Group Holdings' net profit is expected to slide further in the fourth quarter, the bank warned yesterday as it announced plans to raise some $4 billion in new capital from a rights issue.

'Our fourth-quarter net profit could end up moderately lower than in the third quarter, prior to one-time charges,' said DBS chief financial officer Chng Sok Hui.

That would make it the group's worst quarter since at least the end of 2005, when it reported a profit of $384 million, excluding goodwill charges and one-time gains.

As for dividend payment, DBS said it 'intends to declare and pay a final dividend for the quarter ending Dec 31, amounting to the same absolute cash amount as it would have done had there been no rights issue'.

In future, 'DBS' dividend policy will reflect its long-term sustainable earnings growth and capital requirements, as well as general prevailing financial and business conditions', it said.

'2009 will be a challenging year. We do expect our provisions and NPLs to be up but we don't expect a major spike.'
- DBS chief executive Richard Stanley

Including one-time charges, the Q4 results could be much worse. DBS is expected to take a charge of $45 million to pay compensation to the 900 staff it fired last month. It also expects a further impairment of its investment in Thailand's TMB Bank.

The bank is also reviewing the carrying value of its investment in Indian joint venture Cholamandalam DBS Finance - currently valued at $103 million - 'in view of the liquidity stress experienced by non-bank financial companies in India', it said.

'We will be reviewing the joint venture for possible impairment, but that has not been completed,' said DBS chief executive Richard Stanley in a conference call.

But Ms Chng said that DBS' total income has been 'relatively stable' compared with the third quarter. Net interest income increased, but fee income fell.

Pauline Lee, an analyst at Kim Eng Securities, said that the update by DBS was largely within her expectations. 'The earnings outlook is pretty gloomy for the next six to 12 months.'

Mr Stanley said that DBS doesn't expect a surge in bad loans despite the bleak economic outlook.

'2009 we all know will be a challenging year. We do expect our provisions and NPLs (non-performing loans) to be up somewhat but we don't expect there to be a major spike in these two measures.'

Ms Chng said NPLs have risen 'moderately' since the third quarter, while specific allowances for bad loans have increased 'largely from SME (small and medium enterprise) loans in Hong Kong and Greater China as well as private-banking loans'.

The bank does not expect any material charges for collateralised debt obligations or CDOs in the fourth quarter, she added.

As a result, 'overall allowance charges are expected to be modestly below the third quarter'.

In Q3, DBS's profit - excluding one-time charges - fell 38 per cent from a year earlier to $402 million, hit by a sharp rise in allowances for bad loans and a steep drop in fee income.