What? Another S$1 billion goodwill charge at DBS HK?
by Corporate Observer Team , July 30, 2010, 1630 hours SINGAPORE, ( July 30, 2010) – Almost 10 years after DBS Group grossly over paid for its acquisition of its Hong Kong operations, the Singapore’s largest banking group is still talking about goodwill impairment to wipe off value of its key asset up north.
In a surprise move today, DBS said it has made a one-time goodwill impairment charge of S$ 1.02 billion during the second quarter for DBS Hong Kong Limited, causing the bank to report a loss of S$300 million.
“Since the previous review, there have been noticeable and persistent strains in wholesale funding markets, which have driven banks to adjust their funding strategies and liquidity positions. Given these structural changes, there is an increased likelihood that the interest margin compression recently experienced by DBS’ operations in the territory will persist,’’ DBS – the first local bank to report earnings for second quarter – said.
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Net interest income remained stable at S$1.07 billion. DBS utilised its capital and liquidity position to support customers’ financing needs as regional economic conditions strengthened. Loans expanded 9 per cent from the previous quarter from broad-based regional corporate loan demand and from housing loan drawdowns in Singapore and Hong Kong. DBS was also active in supporting corporate customers’ financing needs through bond issues.
But net interest margins declined nine basis points from the previous quarter to 1.84 per cent. More than half of the margin decline was due to a shift in the securities portfolio towards higher-quality issues with lower yields. In addition, deposit costs were higher due to competition for USD and HKD funding. Despite its low cost deposit base from POSBank, DBS’s net interest margins have been unimpressive in recent quarters.
Non-interest income rose 16 per cent from the previous quarter to S$748 million. Fee income increased 5 per cent to SGD 358 million. Wealth management fees benefited from increased product sales while credit card revenues increased with higher transaction volumes. Loan syndication fees remained at the previous quarter’s strong levels.
Trading income grew 21 per cent from the previous quarter to SGD 278 million. The rise was driven by customer revenues, which grew 45% and accounted for more than half of total trading income. Investment gains doubled to SGD 98 million as there were increased opportunities for profit-taking of debt securities.
If any other good news, expenses rose 2 per cent from the previous quarter to S$ 717 million. The cost-income ratio was little changed at 40 per cent.
Return on equity was 11.1 per cent and return on assets was 1.07 per cent, compared with 8.2 per cent and 0.82 per cent respectively in the previous quarter.
DBS CEO Piyush Gupta could be forgiven for hopping mad after the banking services breakdown fiasco.
After all, the third person to occupy the DBS hotseat in as many years had been quick to stamp his mark – under a PR blitz, no less – fronting numerous new announcements and initiatives by Southeast Asia’s largest bank, presumably, in a bid to raise the bank’s profile regionally.
Nine months into the job, Mr Gupta, who took the reins last November, has so far overseen a move to expand DBS’ self-service banking network; a major divestment in India; appointment of a new private banking chief; a repositioning of POSBank business and the re-establishment of its project finance business.
But someone probably forgot to tell Mr Gupta that in a restaurant, it doesn’t matter how fanciful and varied its menu is – what matters most is the kitchen. Not that Mr Gupta, who carries a reputation of being an “operations guy”, needs reminding.
Either way, the message would have hit home on Monday – following the embarrassing fiasco when DBS’ automated teller machines (ATMs) as well as its Internet and mobile banking services broke down for at least seven hours.
... Three weeks ago, in media interviews, DBS chairman Peter Seah talked up DBS’ strategic road map to strengthen its Asian footprint, lending his weight to Mr Gupta’s vision for the bank.
The bank might want to consider getting its house in order first.
