DBS: This is how much higher rates will boost earnings

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DBS Group is totting up just how much will flow through to its bottom line as the world gears up for higher interest rates. 

Goldman Sachs on Friday said it now expects seven 25 basis-point interest rate hikes from the U.S. Federal Reserve in 2022, compared with its early forecast for five increases. Other analysts are following suit and increasing their interest rate forecasts. 

Piyush Gupta, CEO of DBS, said, “we reckon that we’ve given up about S$2.8 billion to S$3 billion of interest income in the last two years,” and around S$10 billion or more in revenue due to rate cuts at the end of 2019 and in early 2020. 

The bank had reported Monday that its fourth quarter net interest income inched up just 1 percent on-year to S$2.14 billion despite loan growth of 9 percent in constant-currency terms.

For the full year, DBS posted net interest income fell 7 percent on-year to S$8.44 billion, hurt by the year-earlier interest rate cuts. 

Gupta, speaking at a media briefing on the earnings report, said he expected earnings upside of S$18 million to $20 million per basis point on the commercial loan book. 

In addition, he noted that current account savings account, or CASA, deposits posted strong growth. DBS reported CASA was up 12 percent on-year at S$381 billion at end-December as more expensive fixed deposits were released, with the CASA ratio rising to 76 percent from the “high 50s.” 

CASA is a cheaper way for banks to raise money, compared with other sources such as fixed deposits, and that can boost profitability and net interest margins.

“We’re going into a rising interest rate environment. the structural shift in our CASA ratio is going to be extremely beneficial for us in coming periods,” Gupta said.