SINGAPORE (July 29): DBS Group Holdings may have achieved 11% growth in total income of $7.26 billion and 12% growth in net profit of $3.254 billion for 1HFY2019 but these growth rates may not be repeated in the second half, cautions CEO Piyush Gupta.
See: DBS posts record 1H earnings after 20% rise in 2Q earnings to $1.6 bil
If US Federal Reserve chairman Jerome Powell cuts the Fed Funds Rate by 25 bps on July 30, DBS’s net interest margins are likely to ease by 1bps, to 1.90% in 3QFY2019, compared to a 2QFY2019 NIM of 1.91%. If the Fed cuts a further 25 bps off the FFR later this year, DBS NIMs are likely to ease by a further 1bp to 2 bps to 1.88%. “We will wind up with NIM of 1.89% to 1.90% for the year,” Gupta says.
And although business momentum remains healthy, DBS is unlikely to witness double-digit income growth in the second half. Instead, Gupta expects it to almost halve to 6%.
In 2Q2019, DBS saw loans grow by $15 billion or 5% y-o-y, led by non-trade corporate loan growth and consumer loan growth. “Loan momentum [in 2H] will consistent with the first half,” Gupta says.
What could make a difference is write-backs. Special provisioning has come in lower than expectations in 2HFY2019. During the second quarter, DBS took the opportunity to build up general allowances.
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“We might have some allowance to write back later on in the year. We were very conservative in our offshore & marine provisioning. As the cases are getting restructured, the companies are repaying,” Gupta says.
Meanwhile, Digibank, which DBS launched in India in 2016 and in Indonesia in 2017, remains loss-making. “The businesses are still loss making and they will continue to be loss making for another 2-3 years, but trajectory is beginning to track what we were hoping,” Gupta says. “We are tracking 80-90% of our model expectations. We’ve slowed down customer growth and we’re getting better profile customers. We’ve started our unsecured lending, and some of the other products we launched are doing reasonably well.”
In addition, DBS is refreshing and rebranding Digibank in Hong Kong which will addresses all the pain points that customers have experienced. “We do ‘instant’ everything,” Gupta says, referring to instant account opening, instant money transfers, payments, wealth management, financial planning, cards, and so on. “We’ve a very competitive product.” Next year, there are plans to take Digibank into Taiwan and Vietnam, he adds.
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When asked about competition from new digital banks which are awarded new banking licences by the Monetary Authority of Singapore, Gupta says both MAS and the Hong Kong Monetary Authority have put in guidelines ro ensure all new players have to demonstrate a profitable business model.
“The regulators are ensuring that this industry does not go the way of ecommerce where people endlessly burn money and drive monopolistic behaviour with no profitability objective in sight,” says Gupta.
In addition, MAS has announced some onerous conditions and the applicants will need to meet similar eligibility criteria as a digital full bank applicant. These include capital and liquidity ratios. During the initial stage, aggregate deposits will be capped at $50 million and individual’s deposits will be capped at $75,000. In addition, the bank can only accept deposits from a small group of persons such as business partners, staff and related parties. Digital wholesale banks will not be able to take Singapore dollar deposits from individuals, except for fixed deposits of at least $250,000.
As Gupta sees it, perhaps two sections of the market which are currently underserved but both are high risk and small. “There is an underbelly served by moneylenders so someone could compete with the money lenders. It’s a high risk segment. The credit models that people have used in other countries don’t necessarily work, like Funding Circle and Lending Club where delinquency has gone through the roof,” he says.
Funding Circle is a peer-to-peer lender in the UK that announced it is reining in riskier loans, and cutting its expectations of revenue growth for 2019 from 40% to 20%. In FY2018, the company reported losses of £49.3 million. As for Lending Club, it lost US$128 million last year and has guided for a loss of US$29 million this year.
As for SMEs, most of the survey work done by Enterprise Singapore shows that the availability of credit to SMEs in Singapore is extraordinarily high, says Gupta. But there are some micro SMEs that are underserved, so it is still possible to build a business around that.
“Singapore is not a big market, not a big country. If you take any one of these pockets and ask how much money you could make doing this business, it does not give you room to grow and operate,” says Gupta.
