DBS' loan-deposit spread declined -4bp.
According to Barclays, China margin drag combined with a sharp fall in loan to deposit ratio contributed to a 5bp q/q margin decline to 1.67%. DBS was flooded with deposits in 3Q (+4.2% q/q), while corporate loans contracted (-2.9% q/q).
Here's more from Barclays:
Slowing corporate and mortgage lending combined with rising liquidity flows into Asia and Singapore, is a rising risk to earnings growth, in our view.
Profit beat expectations on low credit costs: DBS reported 3Q12 net profit of S$856mn, 10% above our estimates, mainly due to low general provision impairment charges. PPOP was 3% above expectations mainly due to investment banking (lumpy) and loan-related fee income.
China margin and volume drag: DBS was affected by China's interest rate cuts and slowdown in corporate and cross-border trade business, as we had anticipated. China accounted for a -6bp q/q compression of the -4bp decline in group loan-deposit spread. We still see pressure on loan yields from continued downward re-pricing going forward. Despite fierce offshore RMB deposit competition, Hong Kong's margin was surprisingly resilient, up 2bps q/q to 1.54%, due to better interbank asset yield and stable loan pricing. Management guides for stable group margins going forward.
Slowing loan growth: Management lowered loan growth to 9-10% on a constant currency basis (down slightly from 10% previously) for FY12E and 10% for FY13E. However, we are more conservative and see headwinds to corporate (slowing economy) and mortgage lending (government cooling measures). On a group level, we lower our FY12-13E loan growth estimates to 6.5-8% from 9-10% previously. Our economist forecasts minimal SGD appreciation vs USD in 4Q12 (+0.6% q/q to 1.22) and 2.5% appreciation in FY13E to 1.19.
Too much liquidity and slowing loan growth a drag on margins: Our FY13-14E profit forecasts are 9-10% below Bloomberg consensus, due to slowing loan growth and rising loan competition pressuring margin.
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