Two reasons why DBS hit record profits in 1H12

Limited asset-quality problems and cost controls overshadowed slower revenue growth.

Here's more from CIMB:

2Q12 net profit (S$810m) is within our expectation (S823m) and consensus (S$807m). 1H profit forms 52% of our FY12 forecast. Our estimates, target price (GGM, 1.3x CY12 P/BV) and Outperform rating are unchanged, still expecting catalysts from sustained franchise development from various cross-sell and re-building initiatives.

Revenue trends
Although 1H12 profit (+135 yoy) was a record, 2Q results were achieved with the help of limited asset-quality problems (for how long?) and cost controls; these overshadowed slower revenue growth for the sector. Loan volume was up 3.8% qoq (ahead of OCBC). Margins contracted 5bp to 1.72% (less than OCBC, but still a blot).

Margin contraction was the result of higher funding costs, lower lending yields and low securities yields. On a positive note, HK margins rose 18bp. Fee income fell 7% qoq, broad-based except trade-related (+4% qoq). This performance paled in comparison with OCBC’s impressive showing. Treasury-related income was down 42%, somewhat disappointing. 2Q topline is 7% below our expectation.

Helped by lower costs
Lower expenses and credit costs helped to compensate for the unimpressive topline. Pre-provision operating profit was still 8% short of our estimate even though overheads were 3% lower qoq. Provisions fell 24% qoq as GPs fell on lower loan growth. Net profit was within expectations on good cost-control and falling provisions.

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