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DBS Profit Beats Forecasts on Loans and Fees

DBS Group Holdings reported a 7% fall in second-quarter net profit due to a one-time charge in the period.

DBS, Southeast Asia's largest banking group by market capitalization, posted a net profit of S$560 million (US$369.5 million) for the quarter ended June 30, down from S$603 million a year earlier.

The company recorded an impairment charge of S$159 million for its 16.1% stake in Thailand's TMB Bank to reflect current market valuation for the investment, it said in a statement. There was also a S$55 million allowance writeback for a Singapore property as market valuations improved.

Excluding the one-time items, the net profit for the quarter was S$664 million. That was up 21% from a net profit of S$549 million, excluding a one-time gain, a year ago, and beat the first quarter's better-than-expected profit of S$617 million.

"The operations look very strong. I thought the strong first quarter was a blip -- but it is sustainable. Loans are coming in, fees are up, costs and provisions are under control. It reflects the very strong economy and DBS is the best proxy for the Singapore economy," said David Lum, bank analyst at Daiwa.

Lum, who rates the stock "outperform", said he regarded the impairment charge for TMB Bank as irrelevant for DBS' overall business. "It was never contributing anything for the last several quarters and has no implications for its earnings outlook. It's certainly a non-core item."

TMB Bank earlier this month delayed a planned $1 billion rights issue aimed at recapitalising its balance sheet until August, saying it needed more time for talks with DBS.

DBS derives about one-third of its earnings from Hong Kong, where it also has around a third of its assets. The bank is also in the process of building up its China operation.

Singapore's strong economic growth and a rising property market in Asia have boosted demand for loans. UBS expects loan growth in Singapore to rise to 12% in 2007 and to 15% in 2008, from 6% last year.

Central Bank Is Cautious

On Wednesday, the central bank warned that Singapore's banks have significant exposure to the property and construction sector and said that it was watching the situation. The government has also said it is watching the property market closely, raising investors fears that it could take steps to curb prices.

The property and construction sector has been reinvigorated thanks to several new projects, including two casinos costing $7 billion, a new financial district, and several swanky apartment blocks in prime districts.

DBS said lending grew 19% in the second quarter from a year earlier to S$99 billion, keeping pace with growth in the first quarter and led by loans to businesses in the region and mortgages.

DBS opened the quarterly reporting season for banks and is followed by United Overseas Bank on August 7 and Oversea-Chinese Banking Corp. on August 8.

Interest income for the quarter rose 14% to S$1.03 billion from a year ago, while fee and commission income rose 25% to S$371 million. Interest margins slipped to 2.21% in the second quarter from 2.23% a year ago but were unchanged from the first quarter.

Operating expenses climbed 11% to S$660 million, but the bank's cost/income ratio improved to 42.6% from 43.9% a year ago. Quarterly trading income fell 44% from a year ago to S$97 million.

The stock has underperformed rivals this year, having led the pack in 2006, on concerns that lower domestic interest rates may limit profit gains from money market lending. DBS is by far the biggest money market lender in Singapore.

DBS shares have risen about 1.8% so far this year, while UOB shares rose 18%, and OCBC shares have gained over 21%. The benchmark Straits Times Index is up 22% this year.

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