DBS Is Basking in the Glow of Higher Singapore Rates

(Bloomberg) -- For a lender with a strong deposit-taking franchise, nothing is more pleasing than when interest rates start climbing.

Just ask Piyush Gupta. The CEO of DBS Group Holdings Ltd., Singaporeans' default bank for parking cash, is basking in the warm glow of higher rates.

A 9-basis-point expansion in net interest margin from a year earlier drove return on equity in the first quarter to 13 percent, the highest in a decade. Yes, funding costs on deposits rose by 15 basis points, results released on Monday show. But the yield on almost every lending opportunity – trade finance, other customer loans, or just placing funds with another lender – firmed up even more. 

Contrast this with 2016. Back then, DBS was caught in a squall of bad loans to the city's oil-and-gas services industry, and China's August 2015 devaluation had soured customers' leveraged bets on a rising yuan. Singapore's property market was in the doldrums, even as benchmark interest rates languished below 1 percent. The bank was losing money in all its key markets for taking credit risk, while it was getting hard to make money by taking interest-rate risks.  

But the scare is now over. At S$195 million ($147 million), new nonperforming assets during the quarter were a fraction of the S$900 million average over the previous two years. The integration of Australia & New Zealand Banking Group Ltd.'s units in Singapore, Hong Kong, China and Taiwan seems to be going well, too, with fee and commission income jumping 32 percent in consumer banking and wealth management. (Allowance for credit losses in this division were also up 68 percent, though in absolute terms the amount was to only S$47 million, hardly enough to make a dent in the bank's almost S$2 billion in pre-provision quarterly profit.) 

The biggest good news is interest rates. The three-month Singapore interbank rate has risen to 1.5 percent from 1.1 percent in January. The city's central bank, which uses the exchange rate to influence financial conditions, signaled its preference for a slightly tighter policy this month; and as Jefferies analysts note, historically Singapore banks perform well when the monetary authority starts to tamp down the pace of economic activity.

The three homegrown lenders – DBS, Oversea-Chinese Banking Corp. and United Overseas Bank Ltd. – are among the biggest gainers on the Straits Times Index this year. DBS shares, up 24 percent, are almost bumping up against analysts' consensus 12-month price target. With the real-estate market improving steadily, investors' interest might shift from banks to builders eventually.However, until deposit costs start to catch up more meaningfully with lending rates, the warm glow at DBS may linger. 

To contact the author of this story: Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.

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