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.

Without the impairment charge, DBS would have recorded net earnings of
S$718 million for second quarter 2010. The earnings before the one-time charge were up 30 per cent from a year ago and 35 per cent from the previous quarter. DBS chief executive assured the market today that the Southeast Asia’s largest bank was unlikely to make further goodwill writedowns in the value of its Hong Kong operations.

DBS has done what was needed based on its banking models, CEO Piyush Gupta - probably looking to clear all legacy issues in Hong Kong - told reporters at a briefing. DBS took control of Dao Heng Bank with a purchase price of over S$10 billion in 2001, well over three times the book value of the smallest bank once controlled by Quek Leng Chan.

DBS said:”Taking a balanced view of the different factors driving projected cash flows of DBS Hong Kong Limited, DBS has assessed that it is appropriate to take an impairment charge. The charge reduces the carrying value of DBS Hong Kong to SGD 8.4 billion, equivalent to 2.2 times its book value as at 30 June 2010. ‘’
As goodwill was fully deducted from regulatory capital on consolidation, the impairment charge has no impact on DBS’ capital adequacy ratios. As such, DBS reckons it does not impede DBS’ ability to carry out ongoing business and expand, as well as to pay dividends. Hong Kong remains the anchor for DBS’ Greater China operations. DBS has a fundamentally strong franchise in Hong Kong and is implementing initiatives to expand it.

Most analysts shrugged off the impairment news and expect DBS to continue to perform well, operationally on the back of Singapore’s strongest economic growth recently. DBS shares were slightly lower at $14.50, down two cents during afternoon trade.

DBS said operating trends strengthened further as DBS progressed in its efforts to grow loan market share and customer-driven non-interest income. Allowance coverage exceeded 100% as additional general allowances were taken and asset quality continued to improve. The quarterly earnings were the highest in DBS’ history.
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.