DBS emerged top bank in 1Q12

OCBC, DBS, and UOB posted results that exceeded expectations in 1Q12, but DBS had the strongest growth, by 17%, in fee income.

This is deemed as more recurring and of higher value compared to volatile trading and insurance contributions. DBS’s earnings also exceeded expectations by 19.1% on a broad-based improvement in interest and non-interest income. 

Here's more from the research by CIMB:

1Q12 results outperformed estimates, driven by higher trading income and lower credit provisioning. Interest and fee income were stable. Asset quality was sound. The three banks remain cautiously optimistic. DBS is retained as the top pick for its superior earnings quality.

Looking back at 1Q12

1Q12 sector net interest income grew 2.9% qoq. As expected, net interest margins bottomed out in 3Q/4Q11, expanding by 1-4bps in 1Q12. Overall loans grew 3.2% qoq. UOB had the highest loan growth of 2.6%, followed by DBS. OCBC’s loan book dipped 0.4% qoq. 

Overall fee income grew 27.6% qoq. DBS saw a broad-based fee income growth of 17% qoq; UOB by 11.6%. OCBC’s fee income grew by 54.1% on strong wealth management and insurance performance, partially offset by lower stock broking and flat trade financing related fees.

Trading benefitted from a favourable environment in 1Q12. Overall trading and other income grew 45.7%. OCBC’s trading income grew 38.7% qoq. UOB and DBS grew trading and other income by 54.9% and 45.8%, respectively.

Asset quality still sound

Provisions fell this quarter as non performing loans as a proportion of total loans were flat. Loans loss coverage improved across the board. There is no major cause for concern for asset quality as yet, though an eye is being kept on potential signs of asset quality deterioration. Local banks remain well capitalised with core tier 1 ratios ranging from 12.6-14.4%.

Upgrade to Overweight

1Q12 results beat consensus by a clear margin. Even if the beats were driven by trading and renewed concerns on macro uncertainties could push credit charges up and reverse trading gains, current valuations seem to reflect expectations of 11-12% ROE, well below what was achieved in 1Q12.

Who came out tops in 1Q12?

1Q12 was a stellar quarter for the three local banks. All posted results that exceeded expectations, boosted by record interest income, decent fee income growth and, most of all, strong trading and insurance performance.

OCBC’s net profit smashed expectations by 25%, as non interest income grew 47.7% qoq to S$846m, boosted by trading and insurance contributions. DBS’s earnings exceeded expectations by 19.1% on a broad-based improvement in interest and non-interest income. UOB beat net profit forecasts by 10.2% on stronger interest income as well as trading and other income.

Who was the best bank of them all?

It seems DBS came out tops in terms of growth and earnings quality in 1Q12, followed by UOB and OCBC. While trading was a key driver for this quarter’s outperformance, DBS had the strongest growth in fee income, which we deem as more recurring and higher quality as compared to volatile trading and insurance contributions. DBS was able to grow fee income by 17% qoq as wealth management as well as trade and loans related fees performed in the quarter.

In addition, DBS was also able to increase customer flow income in Treasury, which is less volatile as compared to trading gains. Lastly, DBS’s non-interest income fluctuations have been less pronounced compared to its peers since 1Q10. This reflects success in CEO Piyush Gupta’s efforts in stabilising fee and trading income and suggests superior control over non-interest income volatility.