How DBS beat peers in funding management game

Net interest margin expanded by 2bp.

According to CIMB, despite peers experiencing a 6bp NIM decline in 1Q13, DBS bucked the trend by expanding NIMs by 2bp.

CIMB said that while the yield on interest-bearing assets declined by 2bp in the quarter, DBS was able to lower funding costs (down 4bp) by taking advantage of cheap wholesale funding from the money market and reducing its reliance on high-cost fixed deposits.

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At first glance, the increasing reliance on wholesale funding to finance its loan book appears to be a risky move as it holds DBS ransom to sudden rate spikes. However, we believe the interest rate risk is mitigated, as DBS is matching its short-term trade financing loan book with short-term commercial papers, thereby reducing duration risks.

DBS expects NIMs to remain stable at current levels, slightly north of 1.60%, albeit with some fluctuations. Management will continue to rely on the short-term money market to fund its trade financing book.

While DBS’s group loan to deposit ratio has crept up to 89%, at the higher range of its previously guided 85-90% comfort zone, CEO Piyush Gupta remains sanguine on DBS’s liquidity, stating that the LDR is a blunt tool to measure liquidity and DBS will have no difficulty attracting price-sensitive time deposits.

On the lending front, loan yields fell 5bp qoq in 1Q13. This is largely attributed to residual margin pressure from China. Interestingly, DBS was able to maintain its mortgage loan book pricing in Singapore, unlike OCBC which attributed its 6bp NIM decline largely to mortgage repricing.

DBS saw mortgage pricing rise in the previous quarter. Management also guided that its recently launched POSB HDB loans package offers an opportunity to boost margins through fees, despite offering attractive financing rates.

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