DBS: Will 2Q19 be as good as it gets?

DBS ATM in SingaporeDBS ATM in Singapore

DBS is expected to report its second quarter earnings grew on-year, but analysts expect the quarter may mark the peak for the bank’s closely watched net interest margin (NIM).

Net profit for Southeast Asia’s largest bank is expected to come in around S$1.48 billion for the quarter, based on an average of three analysts’ forecasts. Daiwa tipped net profit of S$1.514 billion, while UOB KayHian forecast S$1.452 billion.

The closely watched NIM, or the difference between the interest rate banks charge to lend and their cost of funds, is expected to rise around one to two basis points on-quarter to 1.89 percent or 1.90 percent, analysts have said.

NIM is closely watched by analysts, with Daiwa estimating net interest income makes up around 61 percent to 69 percent of total income for Singapore’s three banks. Net interest income is expected to come in around S$2.41 billion for the second quarter, based on the average of three analysts’ forecasts, compared with around S$2.22 billion in the year-ago quarter.

UOB KayHian said NIM was likely to rise on higher mortgage rates after DBS raised its fixed home rate (FHR) by 40 basis points in April. That meant DBS’s two-year fixed rate housing loans were re-priced higher after the initial two-year period, the brokerage said in a note earlier this month.

But UOB KayHian added that overall, it expected residential mortgages contracted slightly on a quarter-on-quarter basis amid lackluster new sales and continuing repayment of existing housing loans.

CGS-CIMB also cited the mortgage book as a concern.

“While the bank has guided for flatter mortgage growth of S$1.5 billion to S$2 billion in FY19, we think that this target may be revised lower to reflect market conditions,” CGS-CIMB said in a note earlier this month.

NIMs may struggle to grow ahead as the U.S. Federal Reserve has signaled plans to cut, rather than raise, interest rates ahead. Economists surveyed by Bloomberg have forecast the first cut as soon as next week.

The trading and wealth-management segments are expected to face headwinds, analysts said.

“Financial markets were rattled by the escalation in trade conflict in the second quarter of 2019, which resulted in a nasty correction in May,” UOB KayHian said. It estimated wealth management fees declined 8 percent on-year and 13 percent on-quarter due to the weak market sentiment.

CGS-CIMB forecast non-interest income would come in at S$1.097 billion, while Daiwa estimated S$1.109 billion, compared with around S$979 million in the year-ago quarter.

DBS is expected to release its earnings report Monday before the market open.

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