DBS Group Holdings, Southeast Asia’s biggest bank, reported an unexpected second-quarter loss as it booked a one-time goodwill impairment charge at its Hong Kong unit because of pressure on interest margins.

The loss of $300 million compares with net income of $552 million a year earlier, the company said in a statement today. The average estimate of eight analysts surveyed by Bloomberg was for a profit of $572.9 million. Excluding the $1.02 billion goodwill charge, DBS’ net income for the second quarter rose 30% to $718 million.

 

DBS booked the charge for its Hong Kong unit because “noticeable and persistent strains” in wholesale funding markets meant interest margins will continue to fall, according to the statement. In February 2006, DBS took a charge of $1.1 billion for its purchase of Hong Kong’s Dao Heng Bank, leading to a net loss of $441 million -- the biggest since it started reporting quarterly earnings in 2001, the same year the bank bought Dao Heng for US$5.4 billion($7.35 billion).

 

“To take this write-off when interest rates are at a historic low is prudent,” said Pauline Lee, an analyst at Kim Eng Securities. “They are also addressing the competitive market for deposits in Hong Kong, which might lead to an increase in funding costs, unlike in Singapore where they dominate the low-cost deposit franchise.” She said her “buy” recommendation on DBS is currently under review.

 

DBS shares rose as much as 1.3% before giving up gains to trade 0.3% lower at 10:16 a.m. in Singapore. The city-state’s benchmark Straits Times Index was 0.4% lower.

 

Net interest income, or the difference between what the bank makes from lending and what it pays on deposits, fell 4% to $1.07 billion in the quarter from a year earlier. The net interest margin, a measure of loan profitability, narrowed to 1.84% from 2.01% a year earlier. 

 

The three-month Hong Kong interbank offered rate, or Hibor, has averaged 0.2% over the past year. Hong Kong accounts for 21% of DBS’ assets and 19% of net interest income, according to data compiled by Bloomberg.

 

Singapore’s three-month interbank lending rate, or Sibor, which has averaged 0.6% this year, also remains one of the biggest challenges to DBS and rivals Oversea-Chinese Banking Corp. and United Overseas Bank.

 

RBS analyst Trevor Kalcic on July 14 cut his recommendation on DBS from “buy” to “sell,” saying the bank’s earnings may “disappoint” in the short term because of the city-state’s low interbank rate and rising costs. “The problem is that DBS no longer has room to cut its cost of funds, while pressure on asset yields remains,” Kalcic said.

 

Non-interest income in the quarter rose 10% to $748 million. DBS’ net fee and commission income was unchanged at $358 million from a year ago, as declines in stock-broking and loan syndication activities were offset by higher wealth management fees.

 

DBS’ net loans grew 14% to $146.1 billion from a year earlier as businesses and home owners borrowed more in Singapore and Hong Kong. Total loans in Singapore rose to $292.5 billion in May from $288.1 billion a month earlier, data from the Monetary Authority of Singapore showed.

 

The Singapore government expects the Southeast Asian island’s economy to expand 13% to 15% in 2010. Growth accelerated to 18.1%in the first half, the fastest pace since records began in 1975.

 

The Monetary Authority of Singapore does not expect global proposals on bank capital and liquidity to effect Singapore banks in a “significant manner”, according to its managing director Heng Swee Keat in a speech yesterday.