Deep in the Woods at DBS

(Bloomberg Gadfly) -- For DBS Group Holdings Ltd., Southeast Asia's largest bank, the woods of nonperforming assets aren't at all lovely. They're just dark and deep.

Bad loans rose slightly from the previous quarter to 1.5 percent, the bank said in its June earnings report on Friday. The details behind that number, though, are bleak. For one, the NPL ratio shot up by one full percentage point in just three months to 4.6 percent on its South and Southeast Asia portfolio, a reflection perhaps of DBS's soured-loan troubles in India. Also, but for a near-tripling of write-offs in the first half, the S$4.8 billion ($3.5 billion) in nonperforming assets would be considerably higher than a year earlier.

Low oil prices will probably keep credit costs elevated on loans to Singapore's troubled offshore and marine industry, CEO Piyush Gupta said.

It's hard to see how things can improve in a hurry at DBS: Singapore's property market may be bottoming out, but a strong recovery is not on the horizon. The push into private banking -- the bank bought Australia & New Zealand Banking Group Ltd.'s retail and wealth-management franchise in some Asian markets last October -- is paying off. Trading and equity underwriting remain weak spots, however.

Singapore's short-term interest rates, a benchmark for loan pricing, are failing to keep pace with Libor, hurting profitability. The net interest margin was an anemic 1.74 percent in the June quarter, a 13 basis-point decline from a year earlier.

Fintech is the big hope. As the Singapore central bank relaxes rules on lenders owning non-financial businesses, DBS might be able to deploy as much as $3 billion (10 percent of equity) at the intersection of e-commerce and payments to ward off a growing threat from the Chinese tech trinity of Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd.  

Investors who've pushed the Singapore lender's shares to an 18-year high should be a trifle disappointed by this year's 10.6 percent return on equity. That's double that of Standard Chartered Plc, the other big bank to be roiled by a blowup in Asian emerging markets. Still, at 1.24 times, DBS's price-to-book ratio is slightly lower than that of Oversea-Chinese Banking Corp., the No. 2 Singapore lender by assets.

In the short run, Gupta can retain investors' trust by boosting the annual dividend payout ratio from 36 percent. Beyond palliatives, though, he needs to chalk up a few percentage points on the return-on-equity odometer before he can sleep

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.