Even as global banks are grappling with various scandals, from fixing interest rates in London to money laundering in Mexico, regional banks such as DBS are weathering the crisis and proving to be resilient.
That is not to say they are unaffected by the market turmoil. At DBS, income from investment banking, stock broking and trading all fell during the second quarter. Its non-interest income for the quarter was the weakest for the past two years, which DBS’s chief executive officer Piyush Gupta attributed to the difficult market conditions and the “risk off” situation in Europe.
“We were on the Manchester United deal, we were on the Formula One deal, we were on the Reliance deal, [and] none of those deals happened. They all sort of disappeared. And that obviously is a little bit of a challenge from a capital markets investment banking standpoint for us,” said Gupta at the bank’s results briefing held on Friday, at the bank’s Shenton Way building — its last in those premises before it moves to new headquarters in Marina Bay.
Despite this, DBS numbers were shored up by other less cyclical parts of its business, such as trade, remittances and cards. This helped the bank to post a 10% year-on-year rise in its second quarter net profit to S$810 million ($652 million). Compared to its previous quarter, net profit fell by 13%.
Gupta also sounded a cautionary note on the eurozone crisis and the US slowdown, which are both having an effect on Asia, as reflected by falling purchasing managers numbers across the region. There is no quick fix and the outlook is uncertain, but, on balance, corporate balance sheets in Asia are healthy.
“In Europe, I don’t see a quick resolution,” said Gupta. “In the US, I think there are clearly headwinds. The China slowdown has been real, so for the second quarter, apart from external demand, domestic consumption demand and domestic demand in China has come off a little bit ... So my own sense is that growth in Asia is still slowing somewhat.”
In China, DBS’s net interest margin fell about 55bp and is expected to remain under pressure due to the central bank’s recent move to liberalise the interest rate regime. In June, the People’s Bank of China allowed Chinese banks to price loans at a 20% discount to the benchmark lending rate and offer interest rates to depositors of as much as 1.1 times the benchmark deposit rate. This, said Gupta, is a profound change.
“When you think about China, the whole China banking industry has been built on fixed margins and that’s why it allowed the Chinese banks to make $170 billion in profits last year. So this is actually a very, very significant shift, that they are liberalising the interest rate regime slowly and gradually.”
On the topic of DBS’s acquisition of Temasek’s 67.4% stake in Bank Danamon — clearly a sensitive one given the Indonesian regulators’ restrictions on ownership levels — Gupta said that the bank is in active talks with Indonesia’s central bank and will be submitting a formal application at some stage.
Indonesia’s central bank said last month that it will cap the single ownership limit in local banks at 40%, but will approve higher ownership levels assuming the owners are listed banks in good health with a tier-1 capital ratio of more than 6%. This was deemed by analysts to be positive for DBS, as the bank is in a position of financial strength.
