DBS Group Holdings announced a net profit of $2 billion, up 99% q-o-q and 72% y-o-y. It was not a surprise. DBS has gross provision reserves of $4.13 billion, exceeding the Monetary Authority of SIngapore’s minimum requirement by 31% and Tier 2 eligibility by $1.3 billion.

Of the $4.13 billion in general provision reserves, DBS’s management overlay - the amount over and above what macroeconomic variable models (MEV) dictate - is $1.3 billion. Moreover its allowance coverage is at 109%, and at 203% after taking collateral into account. This leaves DBS with plenty of room for write-backs.

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In 1QFY2021, special provisions fell to just $199, or 21 basis points, while DBS wrote back $190 million to general provisions. This resulted in just $10 million in total allowances in 1QFY2021, compared to $1.086 billion of total allowances in 1QFY2020, a swing of more than $1 billion. Pre-provisioning profit in 1QFY2021 was $2.267 billion, down 8% y-o-y. This was caused by net interest income being pressured by lower net interest margins which averaged 1.49% compared to NIM of 1.86% a year ago. DBS CEO Piyush Gupta has guided for NIM of 1.45% to 1.50% this year.

DBS’s 1HFY2020 pre-provisioning profit was $4.713 billion, and there is no reason why 1HFY2021’s net profit cannot match that. Last year DBS announced a full year net profit of $4.721 billion compared to $6.391 billion in FY2019.

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“New non-performing asset formation is below pre-pandemic levels. Full-year total allowances are likely to be below $1 billion,” CGS-CIMB says in an update, indicating that a strong earnings recovery is likely this year.

SEE:Analysts up DBS's TP estimate to at least $31 on 'robust' 1Q results

Meanwhile, Moody's Investors Service says, "Funding and liquidity will remain DBS's key strengths, while capitalisation will likely decrease to a still strong level." 

As an example of global economic recovery, GDP growth in the US in 1Q2021 was 6.4%, and the Financial Times reported that real GDP in the US is just 1% below pre-pandemic levels.

Against this background, DBS’s net profit in FY2021 may well match FY2019’s level.