DBS Group: Strong 2Q, but hit came from impairment charges

Impairment charge hit 2Q results. DBS Group posted 2Q earnings of
S$560m this morning, below market expectations of S$627m (based on a
Dow Jones poll), down 7% YoY or 9% QoQ. However, the decline was
largely due to an impairment charge S$159m to reflect the lower valuation
of its 16% investment in TMB Bank. Excluding this and an allowance writeback
of S$55m, net earnings would have been S$664m, meaning yet another
record set of quarterly earnings for the group. With 1Q net earnings of
S$617m, 1H07 earnings came in at S$1177m (+5% YoY).
Broad-based growth from key units. Similar to 1Q, DBS enjoyed broadbased
growth. Interest Income grew 14.5% YoY to S$1027m, while Not-
Interest Income rose 2.5% to S$524m, giving total income of S$1551m or
up 10.2%. Net Interest Margin (NIM) stood at 2.21% in 2Q, same as in
1Q07. Customer loans rose 5% QoQ or 19% YoY to S$99b. Once again,
this was led by corporate and SME loans in Singapore and in the region.
Fee income posted double-digit growth. Fee & Commission surged a
strong 25.3% to S$371m. Buoyed by the last quarter's strong rally in the
equity market, several units benefited from brisk trading activities. The key
units with strong double-digit growth were Stockbroking (+76% YoY to
S$58m), Wealth Management (+79% YoY to S$68m) and Credit Card (+26%
to S$35m). For 1H07, fee income expanded 22% to S$680m.
Most key indicators showed improvements. Expenses were flat QoQ
but up 11% YoY to S$660m, giving cost-to-income ratio of 43%, same as
1Q, but below 2Q06. Non-Performing Loan rate improved from 1.5% in 1Q
to 1.4% in 2Q07. Non-Performing Assets rose 2% to S$1.49b. Excluding
one-time items, ROE improved to 13.6%. For 1H, ROE was 13.4%. Capital
Adequacy Ratio stood at 14.7%, with tier-1 at 9.4%, compared with 13.6%
and 9.6% in the previous quarter.
Maintain BUY. DBS has declared 2Q dividend of 20 cents per share, same
as 1Q07. This means total dividend of 40 cents per share for 1H07 (versus
17 cents for 1Q06 and 34 cents for 1H06). There is an analysts' briefing
later and we will provide further updates later on. Meantime, our rating for
the stock is a BUY.