DBS GROUP HOLDINGS was the last to report results for the third quarter today. For Singapore’s largest bank, it was a record quarter. Net profit came in at $722 million, 15% above consensus of $629 million. United Overseas Bank reported a net profit of $688 million for 3Q10, up 37.5% y-o-y and 14.3% q-o-q. This is 16.4% above consensus expectations of $591 million. Oversea Chinese Banking Corp. reported 3Q10 net profit of $570 million, up 27% y-o-y and up 13% q-o-q. This is marginally above market expectations of $557 million.

Both DBS and UOB saw their bottom lines boosted by sales of financial instruments. UOB booked a profit of $103 million from “available-for-sale assets” in 3Q10, almost five times that of 2Q10’s $22 million. DBS recorded gains of $123 million as it too took profit from the sale of financial instruments.

 

“If you go under the hood, net interest income is flattish, loan growth looks like it’s 1%, fee income is soft, and we made a lot of income on selling securities,” says DBS CEO Piyush Gupta, who is on the cover story of this week’s The Edge Singapore to outline his nine-point plan of action to unleash the bank’s profitability.

 

“Around the sale of investments, the truth is the last quarter was a fantastic quarter to take gains on fixed income securities. Tenure was down to 2.4% and everybody around the world would have done that. If we hadn’t taken profit at 2.4%, people would be asking why not?” he explains. “Loan growth of $6 billion or 6% and our SGD loan growth of 7% is very strong. We continue to gain market share in Singapore,” he adds.

 

DBS also saw a strong recovery in Hong Kong, where net profits rebounded 33% y-o-y and more than double q-o-q to $190 million. The performance here was driven by a recovery in corporate and SME business.

 

All three banks saw their net interest margins (NIM) in 3Q10 come under pressure, with DBS’s NIM down 4bps to 1.8%, and a substantial decline for the 2.03% in 3Q09. UOB’s NIM fell 7bps q-o-q to 2.07%. OCBC’s rebounded 2 bps to 1.98%. The low interest rate environment may continue to pressure NIMs, analysts say. All three managed to keep their cost-to-income ratios under control. DBS’s was stagnant at 40%, UOB’s fell 4.9% to 37.8%, while OCBC’s ratio is the highest at 41.7%. OCBC also has the highest loans to deposit ratio of 86.5% compared to DBS’ at 79% and UOB’s at 81%. 

 

In a report on Nov 4, RBS banking analyst Trevor Kalcic says DBS’s earnings were weak, although its strategy is strong. “Unfortunately, the over-riding short-term concern is net interest margins that continue to grind lower (down 4bp qoq in 3Q10 to 180bp) with no end in sight. We retain our Sell rating and $11.50 target price, as we believe earnings delivery will become increasingly challenging,” he says in his report.

 

On the other hand, Goldman Sachs remains positive on the strategy and the longer term outlook. “Recall CEO Piyush Gupta earlier laid out his strategic priorities for DBS — reinvigorate the bank by strengthening its Singapore base, and improve the Hong Kong and Asean business, including building the fee income base. We believe longer-term investors should focus on this strategy, taking particular note of structural improvements, and believe strategic re-shaping has the scope to surprise on the upside and drive a rerating. Re-iterate Buy on DBS,” it states in its report. 

 

The key differentiator is likely to be the way the three banks manage their book and boost their non-interest income. Interestingly, DBS is likely to see a banner quarter in 4Q10, as it has played lead manager or co-lead manager for October’s mega-IPOs, and it grabbed a slice of the mid-cap IPOs in Hong Kong, including a bit part in the largest IPO of all this quarter, the listing of AIA. Gupta says there are several deals in the pipeline over the next six months including seven or eight active mandates in North Asia, a couple of mandates out of India, and, of course, in Singapore.

 

Gupta says: “We continue to have market leading position in Singapore for the capital market suite, so we’re top of the league table for equity IPOs, REITs, follow-ons, fixed income SGD and we’ve dramatically improved the M&A in the region. I saw a league table which had us No. 7 from 17 and that was an Asia wide league table.” DBS will also be launching its own preference shares for retail investors before the end of the year.

 

So, looking ahead, while loan growth may slow and NIMs could be under pressure, deal flow on the capital markets is likely to benefit the banks. UOB, for instance, is believed to also have a few mandates, including the impending IPO of Sabana REIT.