Dbs Group Hldgs Ltd S/Adr

Over to you, Agnes.

Okay, good morning, everyone, and welcome to DBS's third quarter financial results media briefing. To take us through the numbers, this quarter we had T.O.P. Schultze and T.F.O. Chunsofty on the line. As per past quarters, both T.O.P. and Chunsofty will go through their presentation deck, after which we'll be happy to take questions from the media. To follow along in the presentations, you can find the materials on the investor relations website. so without further ado, Dr. Yu, please. Thanks, Agnes. Good morning, everyone. Slide two. For those of you who have got the slides in front of you, good morning, everyone. Thank you for joining us for our results briefing. Third quarter net profit was up 4% on quarter as the economy rebounded from circuit breakers in post-the-quarter default. Total income declined 4% to $3.58 billion. Net interest income was 6% lower as loans were stable and net interest margin tightened 9 basis points. The impact of lower interest rates was softened by a 17% rally in fee income as economic activity resumed. Trading income slowed from a record high in the previous quarter. Total allowances in the first nine months quadrupled through $2.49 billion from the same period the previous year. They included $1.5 billion of general allowances to fortify the balance sheet against risk arising from the pandemic. The target increased general provision reserves by 60% from the end of last year to $4.02 billion. General allowance reserves were $1.2 billion above the amount eligible for consideration as tier 2 capital. This high level of general allowance reserves cushioned capital levels against credit losses should the economic environment deteriorate further. The NPL ratio was 0.1 percentage point higher at 1.6% and NPA rose 3% over the quarter. Allowance coverage was 107%. After taking collateral into account, allowance coverage was 200%. Liquidity remained amper as deposits grew 9% of $38 billion from the start of the year in constant currency terms. High-quality current and savings accounts grew $70 billion over the same period, allowing more expensive fixed deposits to flow out. This improved The CASA ratio by 10 percentage points to 69%. Third quarter liquidity coverage ratio and net stable funding ratio were comfortably above regulatory requirements at 103% and 123% respectively. DCG1 ratio was 13.9%, also well above regulatory requirements. and above the group's target operating range of between 12.5% and 13.5%. The board declared a third-quarter dividend of $0.18 per share, in line with MES guidance. Slide 3. Third-quarter net profit increased 4% from the previous quarter of $0.30 billion as allowance build-ups slowed and economic activity recovered. Profits before allowances declined 9% to $2.04 billion. Total income was 4% lower at $3.58 billion. Net interest income fell 6% or $132 million to $2.17 billion as loans were stable and net interest margin continued to tighten. The lower net interest income was almost offset by a rebound in free income as economic activity recovered. fees rose 17% or $117 million to $798 million. Other income declined 18% or $134 million to $608 million as trading income fell from the record in the previous quarter. Expenses increased 4% or $56 million to $1.54 billion from COVID-related support for staff and non-recurring occupancy costs. General allowances of $236 million were set aside during the quarter compared with $560 million in the previous quarter. Specific allowances were 10% or $29 million higher at $318 million. This was 31 basis points of loans in line with the first half. Slide 4. Profits before 9 months increased 5% from a year ago to a new high of $6.75 billion. The record performance enabled significant general allowances of $1.5 billion to be set aside. These were taken to fortify the balance sheet against risk arising from the pandemic. Net interest income fell 3%, or $243 million to $6.96 billion. Incremental income from loan growth of 5% was offset by a 23 basis point decline in net interest margin. Fee income was stable at $2.31 billion. Higher wealth management, brokerage and loan-related fees were offset by lower card and investment banking fees. Other non-interest income was 31% or $489 million higher at $2.06 billion. This was due to profits realized on investment securities we had appreciated with lower interest rates. Expenses fell 2% or $80 million to $4.58 billion, largely due to stock support grants. An increase in base salary calls from higher headcount was offset by lower bonus accruals and lower general expenses such as for traveling and marketing. General allowances of $1.5 billion were significantly higher than in the same period last year, as allowances were front-loaded conservatively. Specific allowances increased $428 million to $990 million, mainly due to the significant NPL in the first quarter. Total allowances of $2.49 billion were built up in the first quarter of 2020. This was against the guidance of $3 billion to $5 billion over two years. Nine-month net profit declined 24% from a year ago to $3.71 billion. Return on equity for nine months 2020 was 9.7%. Slide 5. Third quarter net interest income declined 6% from the previous quarter to $2.17 billion. The decline was due to a nine-basis point fall in net interest margin to 1.53%. This occurred as the impact of interest rate cuts in the first half were felt more fully. Nine-month net interest income declined 3% from a year ago to $6.96 billion. Net interest margin for the period fell 23 basis points to 1.67% from 1.90%. This more than offset the impact of a 5% rise in loans and a 12% growth in deposits from a year ago. A considerably more flushed balance sheet also contributed to the decline in net interest margin as excess deposits were deployed into low-risk liquid assets. Net interest margin is expected to stabilize between 1.45% and 1.50% in the coming year. Net loans on slide 6 now. Net loans were stable in the third quarter at $371 billion. Non-trade corporate loans fell $2 billion on quarter. Healthy underlying momentum was marked by repayments as the economic environment stabilised and customers repaid $3 billion of short-term loans drawn earlier in the year. Singapore housing loans dipped as the circuit breaker in the second quarter interrupted transactions. Third quarter new bookings have rebounded and social distancing measures eased. Trade loans were stable. From end 2019, loans grew 3% or 11 billion in constant currency terms. Non-trade corporate loans grew 9% or 18 billion. They included short-term facilities drawn by corporates at the onset of the pandemic. The increase was partially offset by trade loans, which were 4 billion lower. Singapore housing loans were slightly lower. Slide 7. Deposits grew 1% from the previous quarter in constant currency terms to $447 billion. Current savings accounts continued to grow, rising 5% from $16 billion to $310 billion. The increase in low-cost funding allowed $13 billion of more expensive fixed deposits to flow out. Since the end of 2019, deposits grew 9% from flight to quality inflows at the onset of the pandemic. CAFA increased 29% of $70 billion, and $33 billion of more costly EFIX deposits were allowed to run off. CAFA comprised 69% of deposits at the end of third quarter, 3 percentage points more than the previous quarter, and 10 percentage points more than at the end of 2019. The liquidity coverage ratio of 135% and net stable funding ratio of 123% were both above regulatory requirements. Slide 8. Free income recovered in the third quarter as lockdowns imposed during the previous quarter were eased and economic activity resumed. Net fees rebounded 17% on quarter to $798 million. This made it the third highest quarter on record in line with pre-COVID levels. The chart shows gross fees broken down by product. Stronger market sentiment helped wealth management to its second-highest quarterly performance. Wealth management fees rose 25% to $380 million as investors looked to investment products and insurance policies to improve returns in a low-interest rate environment. Cuts grew 22% from the previous quarter and $60 million as lockdowns eased and consumer spending increased. However, they remained 21% lower than a year ago. Investment banking and loan-related fees were higher than the previous quarter. Nine-month net fee income was unchanged at $2.31 billion. Wealth management, brokerage, and loan-related fees increased but were offset by lower cuts and investment banking fees. Slide 9. Nine-month expenses fell 2% to $4.58 billion largely due to the job support scheme. An increase in staff costs on higher headcount and leave accruals was offset by lower bonus accruals and lower general expenses. With total income up 2% for the nine months, the positive draw of 4 percentage points improved the nine-month cost-income ratio from 42% a year ago to 40%. Third-quarter expenses rose 4% from the previous quarter to $1.54 billion due to COVID-related support for staff, as well as increasing occupancy costs. Slide 10. Asset quality was in line with recent quarterly trends. Non-performing assets rose 3% from the previous quarter to $6.52 billion, as new MPA formation was moderated by repayments and write-offs. In the third quarter, there were a handful of episodic corporate new MTAs from Singapore and the region and across various industries. We expect new MTA formation to turn up in the coming quarters as loan moratoriums taper off. The NTR rate of 1.6% was in line with previous quarters. Slide 11. Specific allowances in the third quarter increased 10% to $318 million. Specific commissions were 31 basis points of loans in line with the 30 basis points of loans. Specific allowances in the first nine months increased 76% to $990 million, or 30 basis points of loans. Slide 12. General allowance reserved rose 6% during the quarter to $4.02 billion. This was 60% higher than the end of 2019. We continue to adopt a conservative stance on provisioning. General provision reserves exceed the MEF minimum requirement by 32%. General provision reserves are also $1.2 billion higher than the amount eligible as Tier 2 capital. This high level of general allowance reserves pushes capital levels against credit losses should the business environment deteriorate. Should the situation turn out to be more benign, we will be in a position to write back provisions. As of 30 September 2020, total allowance reserves stood at $7 billion. Allowance coverage as a percentage of MPA was 107%. As a percentage of net MPA after taking collateral into account, coverage was 200%. Slide 13. Our capital position continues to be strong. The common equity tier 1 ratio rose 0.2 percentage points from the previous quarter to 13.9%. Profits continued to accrete and the risk-weighted asset base remained stable. The CET1 ratio was above the group's target operating rate and considerably above regulatory requirements. The leverage ratio of 6.9% was more than twice the regulatory minimum of 3%. Slide 14, the Board declared a dividend of $0.18 per share for the third quarter. This aligns with MEF guidance on 29 July for local banks to moderate dividends for the 2020 financial year. The script dividend scheme will be applicable to the start of the year and dividends will be issued at the average of the closing prices of 12 and 13 November 2020. Based on yesterday's closing share price, the annualized dividend yield is 3.3%. Slide 15. Third quarter performance reflected improving business momentum. Underlying loan growth was healthy and a rebound in free income softened the impact of lower rates. We remain vigilant around expenses and leverage digitalization for efficiencies. Our conservative move to front-load allowances this year has fortified the balance sheet. The long-term growth story for Asia and the bank is well-positioned with ample liquidity and healthy capital. We look forward to doing our part to support our customers and the community through this period. I'll now hand you over to Piyush for his observations.

All right. Thank you, Piyush. I have only two slides, so let me take you to the first of those. It says business outlook. I just wanted to underline what Swapri said. The underlying business momentum obviously improved in the quarter. China, as you can see, there is a very clear V-shaped rebound. But Taiwan is looking up. I think Hong Kong is also improving. And around the region, we can see the impact of the opening up of our economies. So the rebound is actually quite general across the region. Underlying loan momentum continues to be good in terms of business as usual. The headline loan number was flat. As properly explained, we had a lot of short-term drawdowns in the early part of the year as companies drew down nines of credits just to buffer and create a cushion, liquidity cushion. I think as people are getting more comfortable with the overall liquidity situation, many companies are in a position to pay down their short-term liquidity. So, we think some of that. We saw some of that in third quarter. We might see a little bit more in the fourth quarter. But, you know, to factor all that in, our overall loan growth for the year, non-trade loan growth, will be some close to $16-17 billion. This is actually quite strong. So the loan momentum is looking decent. Again, as Poppy pointed out, the fee momentum was actually quite striking. Wealth management fee picked up really well across the spectrum. People are investing in a whole diverse range of products, including insurance. These are still slower than last year because we've had a lot of face-to-face consultation. Even insurance sales came back. So I'm actually quite positive about the prospects for that business. Cars came back as well. They haven't recovered to the same levels of 3 years ago. They are still 20% down but quarter on quarter, the gain was quite meaningful. And again, we are seeing that that momentum is likely to continue heading upwards. Just a quick comment on deposits. Gopi mentioned this too. You know, our Karsa balances grew $70 billion this year. That's quite extraordinary. And within that, it's about half and half. Half of it is US dollars. The other half of it is US dollars. And that just suggests that it is not just flight to quality and the government's largest in Singapore across the board. Investments over the years in some action banking, cash running, etc. continue to pay off. Of that 70 billion, we had a 15 billion growth in the third quarter. So this is again something that is a country to sustain quite well. The deposits obviously are a double-edged sword because we have so much excess liquidity. We put it to work in very low-risk assets. So they're accretive to revenues, they're accretive to return on equity. They are a drag on NIM, but overall they're a good business to do. I think we will see a very strong rebound on nominal growth rates across Asia next year. Look at the IMF forecast. They're forecasting about 5% in growth, 5.1% for global world economic growth. Their forecast is 7% for Asia, 6.9%. And if you look at the key countries that matter to us, China's projecting 8%, India's projecting 8.5%, Indonesia's projecting 6%. Even the mature markets, Singapore and Hong Kong are looking at between 3% and 4% growth rate. This is true. This is off a low pace because of the big correction this year. Nevertheless, from a business momentum standpoint, I think this should be positive and provide us some wind in the sails for our business activities next year. So we think single digits and low growth next year is actually fairly realistic. We should be able to achieve that. We also think double-digit growth in pre-income next year is also quite realistic based on the overall momentum that we are seeing. The challenge next year, of course, will be that NIM will continue to be a headwind. And that is, even though market rates are likely to get much lower in holidays, I don't see them getting much lower. On the other hand, the fact is that the repricing will continue to filter through our loan book. And that is going to create some incremental squeeze on NIM next year. So if we set a guidance for next year, we'll probably wind up somewhere between 145 and 150 basis points in terms of NIM for next year. So one of the things we're doing on the back of that is making sure we're still efficient in managing our costs. Our cost-income ratio for this year will probably come in at 43, which will be flat to last year. We expect to hold our expenses for next year at the same level as they were in 2019. And that obviously requires us to continue to tighten the best and continue to take structure changes in the nature of our business. So that is something that we will continue to do. If you go to the next slide, this is the credit outlook. Now, you know, again, our fall on credit and what's happening overall to the portfolio is still pretty consistent with what we guided two quarters ago. And fundamentally, it is based on the premise that you will see situation get much worse next year than it is this year across the board. which is why we gave guidance for two years instead of guidance for one year when we said we would probably take somewhere between 3 and 5 billion dollars. The reason for that of course is that the moratoriums this year and the slew of government actions are masking what is happening in the underlying economy. And the truth is at this point in time we don't know any better. So which is why we are holding our guidance to what we have said some time ago. I think it's quite instructive that in those markets and those segments where the moratoriums are not in effect, we are seeing some episodic, you know, profit stress. So, in this quarter, we saw, you know, a couple of consumable companies in China, we saw an oil bunkering company in Hong Kong, we saw a state-owned enterprise in Indonesia, we saw a company shipping related to a earlier clarity flag in Singapore. So there's no pattern. It's not industry specific. It's not country specific. But the fact is that with the amount of demand destruction that the world has seen this year, it is not unreasonable to expect that there will be some companies which will feel the stress. And so you see this if it's not a case. My expectation is that as the government relief programs start winding down, you will see that LPL formation next year will increase. So if you take a look at our own situation, we have about $13.5 billion of SME loans and moratoriums. Now it's only 5% of our book. It's smaller as a percentage than other banks. Nevertheless, it is $13 billion of SME loans. And at this point in time, it's very hard to call what is going to happen to these companies once the moratorium gets over. You could make any case between 10 to 15 to 20% of default rate in this moratorium portfolio. And it's very hard to guess if the company does go into default, what is the recovery rate going to be. So a lot of this is still quite speculative. Why at this point in time are we mentioning our guidances, you know, the 3 to 5 million to be a fair number. It could be that we're being conservative. It's interesting to observe that a lot of the global banks in the third quarter are also a little bit more sanguine about the credit environment, and that could be the case. And if that is the case, then we just have to be more conservative, and as Shafi said, we will have the opportunity to go right back. And if that is not the case, and you do see more tests in the next year, then the fact that we have quoted and taken a lot of the provisions early should allow us to be able to negotiate the next few quarters a little bit better. On the consumer side, our moratoriums were unchanged. They're about $5.5 billion. It's mostly Singapore mortgage loans. I'm a lot more comfortable with that book. I doubt that you see a lot of pain in that particular book. We also still have about $4 billion of the government support, you know, the temporary leasing loan program. Again, because they're heavily supported by government guarantees, actually loss in that book is likely to be manageable. So overall, let me put it this way. I don't think anybody can really forecast and foretell what's going to happen on the credit side over the next 18 months. Frankly, it's anybody's guess. So we just have to take a conservative posture and stance and make sure we're well prepared for any eventualities that might arise. So I will stop there and I will be happy to take questions.

Aaron, you can take questions now.

Thank you. We will now begin the question and answer session. Participants with questions to pose, please press 01 on your telephone keypad and it will be placed in the queue. To cancel the queue, please press 02. Once again, participants with questions to pose, please press 02. 01 on your telephone keypad now. Our first question, Jen Imrong from Bloomberg. Please go ahead.

Oh, hello.

Hello.

Good morning, everyone. Yes, sorry. This is Jen Imrong from Bloomberg. Congratulations on a good set of results. I have three questions. First one, dividend policy. Do you see a recession back to a full level next year? Second, how are you looking to grow your wealth management franchise business, given that it has given you lots of education efforts so far? Do you expect consolidation in the wealth industry, and how prepared are you for an acquisition? The third one, on end, debacle. What does it mean to the company's financial services escalation, including its application for a physical bank license in Singapore?

Thank you. All right. Sir, on our dividend policies, you know, until the end of the first quarter of next year, we are guided by the MAS in respect of what dividend we can pay out. I think beyond that, one, we will still have to have conversations with the central bank to see if they have any continuing point of view. If you look at central banks in other parts of the world, they continue to be somewhat conservative in terms of letting banks either dividend or do share buybacks. I think many of these connotations will have come to a head over the next several months and I'm certain that our regulator will also keep an eye on what is happening in other parts of the world. But that aside, I do think that if we don't have guidelines, our expectations will start taking dividends back up to where we were. Now, we might not get up there in one fell swoop. Again, depends on the overall assessment of the macroeconomic environment. But we said before that we do believe that we have the capacity to pay more dividends than we are paying right now. And so we go back to our normal dividend policy of paying sustainable and steady dividends over time. So, yeah, unless there is something untoward that happens between now and then, we should expect a few dividends to start going back up from the second quarter. On wealth management, I guess there are two parts to what we are trying to do. One we alluded to before is we are trying to democratize wealth management and in fact we have seen some success at it. What that means is essentially take our wealth management products and make them available to our lower segment of the market, even below mass affluent. We've started seeing quite a meaningful success in that in the Singapore business with our digital portfolios, some robot-assisted portfolios, regular savings plans, budgeting tools into the mass market. Over a million people have downloaded our budgeting tools in the course of this year. So that is helpful and we will continue to drive that to make sure that we offer well-transformed solutions in the mass market space. At the top end of the market, we will continue to do reasonably well. Our AUMs are up at about $180 billion. And as we compare around the region, we are at the top end of the market in terms of our growth in the UN. So I think we are being able to hold our own. We obviously benefited. The amount of wealth management in the region opportunity continues to increase. And it is increasing from around the region, North Asia, South Asia, Southeast Asia. My own sense is that you will see this increase even move from other parts of the world. as we go forward. I do think that the region and Singapore is likely to benefit from a safe haven status as, you know, the uncertainty around the world continues to take hold. We're already seeing a lot more interest from potential clients from the western hemisphere. So I do think that that will continue to give us some momentum as well. Your question on inorganic, we are always open to doing trades. Both the last two trades we did were helpful to us. So I do think we have the capacity to take on what we previously called as bold-sized acquisitions. And if the right deals were to come along, yes, we would certainly look at them in the web science space. Your last question with regard to ANT, first of all, you know, V is now a joint book runner on the V's, so like many of the other people, that's a free event which disappeared suddenly and overnight. But joking aside, my own sense is that the ads will be back in the markets over the next few months. I think they need to reconstruct their business models and so the business model projections might change, but I don't think they'll be back in the market. I personally don't think it will have any significant material bearing on their business agenda in the other parts of the world. I've said before that our biggest agenda is domestic China will continue to be that. So I think while the country will focus on opportunities in Southeast Asia and other parts of the world, as you can see, it's not their principal focus and I don't think it is going to change that either. I don't think it will suddenly become their principal focus. With respect to their aspirations for a license in Singapore, for example, I mean, that's not for me to comment. It's something between them and the regulator. But I have to say that they have a credible platform and so they will continue to be a credible competitor wherever they operate.

Thank you.

Any more questions from Bloomberg? Our next question, Elise So from Asian Private Banker. Please go ahead.

Hello, can you hear me?

Yes, we can.

Great, thanks. A follow-up question on the higher end, like the private banking side of the business. Just want to know, like, can you break up on in terms of how the trend is looking like in terms of maybe the transactions, the advisory, and the DCMPs, like how each of them are going in this quarter? And also another question would be how is the business looking like on the Hong Kong side?

I don't think this quarter's data is materially different from what we've been seeing so far. As you know, Asia consists mostly of transacting markets, so a large part of our income still comes from commissions on trades and transacting funds. Having said that, the underlying theme about DPM and advisory increases continues to be the case. the management of companies increases, the advisory business is booming, but it's still altogether the much smaller part of the business. It's only about 10% of the business overall. And the delta in every year is only a few percentage points. So I don't think it's going to change the underlying shape of that business materially over the next couple of years. Your second question was, Hong Kong, the Hong Kong business is doing very well. I was somewhat concerned originally with the unrest in Hong Kong as well as the possibility that there might be a lot of plight of money from Hong Kong. We're not seeing that. So our areas in Hong Kong are countries who are relatively well. The business is actually in very good condition.

Okay, thanks.

Thank you. Our next question, Rebecca from S&P. Please go ahead.

Hi. Thank you so much for the presentation today. I just wanted to ask about the new bad loan formation in the third quarter. I understand that the first quarter was front load and you had one big client that sort of bumped up the number and then it tapered down significantly in Q2. But I was wondering what the jump in Q3 was. Thank you.

Well, I alluded to it in my earlier comment. It's actually a handful of lines and they're quite diverse. As I said, there are a couple of consumer good companies in China. There is a state-owned enterprise in Indonesia. There is a shipping arm for previously flagged credits in Singapore. So, it's a few different things. There's no any one big item. Some of these, actually, we've taken SPs against. Others are really well secured, so we don't expect to take them on provisions, but we continue to be conservative, both in our recognition of the SPs and providing for them.

Okay, thank you.

Thank you. Once again, participants, with questions posed, or to follow up your question, please press 01 on the telephone keypad now. Our next question, Vivian from SPH. Please go ahead.

Hi, Piyush. I have two questions. So, DBS believes there will be a strong economic rebound next year. And also, many of the U.S. banks seem to think they have turned the corner when it comes to COVID-19 damage. So, would you say the worst is over for DBS? And my second question would relate to the U.S. election. How are you expecting the results to impact DBS? Thank you.

So, the first question, I think I'll answer that in two parts. From an income hedge rate standpoint, the worst is not over because I think net interest will continue to slide down a little bit more. And as a consequence, the hedge rate for net interest income next year will be even higher than it was this year. So we will have to rely on fee income and other income, etc. to make up for that. However, on the thoughts of credit lines, I do think that we will have taken a larger part of what we might have to provide for this year. That's what we're trying to do. We've given the range of 3 to 5. Our hope is to try and cover the lower end of the range this year. And then next year, with a little bit of luck, we don't have to take a heck of a lot more on credits. And so if you can do that, then the improvement in the credit line should more than compensate for any challenges you might have in the operating profit line on account of the interstate environment. On the U.S. results, frankly, I don't know what the results are going to be. If it is still come, then nothing changes. You have the exact situation you have right now in the Democrat House and Republican Senate and administration. So I don't really expect to see any change. If it is Biden, then I do think you see some change inside. In respect of dealing with China, for example, I think, you know, Biden and the Democrats will try and follow the most conventional ways of, you know, diplomatic engagement and try to build a coalition of other countries and so on. Now, in substance, it might not be that much change. If you ask me whether they dropped tariffs, I don't think that would happen. In some cases, it would be more, you know, determined, particularly in the context of human rights. But I think the rhetoric would be milder and I think the rhetoric would help. Because the anxiety and anxiousness that you see particularly in the markets in Asia, I think that will level off a little bit if it is a Biden way.

Okay, thank you.

Thank you. There are currently no questions in queue. Once again, participants with questions to pose, please press 01 on your telephone keypad now. participants with questions to post or to follow up, please press 01 on your telephone keypad now. As there are no further questions in queue, I will now hand the session back to Edna. Over to you.

OK. Thank you, everyone. Since there are no questions, I think we'll call this media briefing to an end.

And we will move to our end of this briefing in five minutes' time. Thank you, everyone. We'll stop off now. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.