Our franchise was resilient because of our strategy of expanding our regional business and reducing our reliance on traditional bank lending and deposit products. The significant and sustained growth of our non-interest income businesses cushioned our bottom line during a period of declining interest rates and sluggish economic conditions in our two key markets, Singapore and Hong Kong.

Even with the challenging circumstances, we remained committed to our initiatives in risk management, up-to-date technology and operations, and strong corporate governance. The payback from these initiatives and investments will become evident as we work to establish DBS as a sound, well-run Asia-based bank.

Banking is about scale, distribution and customer access. Recognising this, DBS and Shin Corporation announced in December the formation of a consumer finance joint venture, Capital OK, in Thailand. The joint venture will sell unsecured loan products, including credit cards and personal credit lines, through Shin Corporation’s nationwide retail outlets. Capital OK will also leverage Shin Corporation’s established resources and customer base, including over 12 million customers from Shin Corporation’s telecom subsidiary, Advanced Information Systems.

In March 2004, we announced an agreement with Thai Military Bank (TMB) and The Industrial Finance Corporation of Thailand (IFCT) to merge TMB, IFCT and DBS Thai Danu Bank, our 51.7% subsidiary in Thailand. The proposed merger will create the country’s fifth largest bank with combined assets of Bt 677 billion ($29 billion), close to four million customers, 462 branches and 963 ATMs across Thailand.

The merged bank will be a larger, more competitive franchise in Thailand, one that combines the large distribution network and broad customer reach of TMB, IFCT’s strength in industrial and project finance, and DBS’ and DBS Thai Danu Bank’s best practices in corporate governance, financial product development, risk management, as well as technology and operations infrastructure. As a strategic partner to the merged bank, DBS will provide expertise and resources through technical service agreements in credit, market and operational risk management, treasury and markets, consumer banking, corporate and institutional banking, SME banking, and technology and operations.

The expansion of our geographic footprint started with very measured steps back in 1998 when 80% of our assets and operating income was concentrated in Singapore. Today, the concentration in Singapore has been reduced to about 60% and Hong Kong contributes about 30% to assets and operating income.

We continue to carefully pursue opportunities in the region both to grow organically and to scale up through acquisitions in higher growth markets. Our immediate focus will be to broaden our franchise in Greater China, Asean and in South Asia. While DBS is frequently the subject of speculation as a buyer of other banking franchises or assets throughout Asia, we believe our stakeholders will increasingly judge us by what we actually do, and not according to unsubstantiated reports.

Looking back, forging ahead
Banking in Asia has fundamentally changed. In the early-to-mid-1990s, even the most simplistic banking models were successful as the massive inflows of funds from around the world helped stimulate money supply and, in turn, fuelled exceptional loan growth throughout the region.

In the aftermath of the Asian financial crisis, local economies recovered, but corporate lending slumped against a backdrop of excess capital, heightened price competition among banks, and increasingly thin interest margins. Consumer and SME markets showed modest growth, but price competition became commonplace.

Notwithstanding intense competition in the region, DBS grew its loan book in 2003 by 6% to $64.3 billion. But interest margins in core products including mortgage loans continued to tighten, depressing the overall interest margin.

Recognising that interest margins would continue to come under pressure, we deployed resources to build and expand non-interest income businesses, achieving considerable success. DBS’ non-interest income rose 21.5% to a record $1.823 billion, four times the $446 million in non-interest income in1998. The ratio of non-interest income to operating income is now 43.4%, and we are beginning to see the fruits of our investments in people, systems and capabilities in these businesses.

Unique role in intermediating excess captial in Asia
DBS differentiates itself through a unique ability to intermediate excess capital in Asia. We originate mandates through our dominant SME franchise in Hong Kong, and through our unmatched access to corporate and SME issuers in Singapore and the rest of the region. We are able to structure, repackage, hedge, underwrite or privately place these requirements through our dominant retail distribution in Singapore and Hong Kong, where we are today the fourth largest banking group.

The success of our wealth management business exemplifies our ability to engineer and distribute sophisticated investment products that are not ordinarily available to the consumer markets in Asia. Our progress underscores our belief that we can serve our customers’ best interests by helping them capture value from changes in interest rates, currencies and securities, while mitigating risk through product or deposit structuring.

Last year, DBS sold a record $8.8 billion worth of investment products including capital protected and capital guaranteed funds, equity-linked notes and unit trusts through the Group’s multiple distribution channels in Singapore and Hong Kong. This compares with Group total sales of $379 million in 1999 when we were selling mostly third-party funds.

We invested significantly in our Treasury and Markets’ structuring capability over the past few years. Today, we are a leader in the origination of investment products in Asia.

Breaking down the silos
On average, we brought three new DBS-originated investment products a week to our customers in Singapore and Hong Kong in 2003. The speed of delivery for these products reflects nimble, yet highly orchestrated execution across functions, departments, and geographies. Our product engineers in Treasury and Markets keep abreast of investor needs through close collaboration with their colleagues nearest to the customers, in Consumer Banking, Private Banking, Enterprise Banking and Investment Banking.

With our employees working as a team instead of in silos, DBS responded swiftly throughout the year to changing market conditions, often “reverse engineering” products to suit customer needs. In the first half of 2003 when interest rates were low and risk aversion high, we offered mainly capital guaranteed funds. When the equities market started to bottom out after the pneumonia virus outbreak in the second half, we launched funds linked to the performances of highly liquid, blue-chip stocks and stock indices. In the fourth quarter, our product specialists led the revival of the call warrants market in Singapore, and these instruments proved highly popular with investors.

Making a mark in the region
DBS Bank (Hong Kong) profits were up 33% to $440 million for the year. Operating income was up 9%, largely on the back of record sales of wealth management products that were structured in Singapore and distributed though our branches in Hong Kong. In fact, Hong Kong outsold Singapore with only 25% of Singapore’s customer base. At the same time we have been able to further streamline operations and reduce expenses by 2.5%. Trends in the second half of the year have been encouraging, particularly as we see unemployment and bankruptcy petitions on the decline and asset deflation moderating.

Sceptics were quick to criticise our acquisition of Dao Heng Bank, and many doubted DBS’ ability to integrate and achieve synergies in Hong Kong. In fact, our fully integrated DBS Hong Kong operation has enhanced the Group’s results. Many key ratios in Hong Kong, such as net interest margin, cost-income ratio, the non-performing
loan (NPL) rate and return on equity, are better than the average for the Group. We have leveraged our Singapore product origination capabilities to capture Hong Kong’s growth prospects.

During the year, we received legislative and regulatory approval to merge the banking licenses of our Hong Kong banking franchises. Following the full integration of front and back-end operations, our Hong Kong banks were rebranded DBS Bank (Hong Kong) Ltd. We also adopted the Chinese name .

Growing a higher return SME franchise
Momentum was strong for our Hong Kong SME (Small and Medium-sized Enterprise) franchise last year. We maintained our 12% trade finance market share, second only to an entrenched financial institution. Trade loans grew nearly 20% last year as we provided banking and financial services to our Hong Kong SME customers, as well as to Taiwanese and Singaporean companies operating in China. Our franchise will benefit as the Closer Economic Partnership Agreement (CEPA) opens up opportunities for the service sector in China and Hong Kong.

In Singapore, we are devoting more resources to grow our SME business by upgrading credit skills, developing specific industry specialisation, and strengthening product capabilities to deepen and broaden our market penetration. Our aim is to serve our SME customers locally, but also as they expand their operations into Greater China, Southeast Asia and South Asia. Our partnership with TMB and the IFCT, for example, will enable us to provide locally relevant services to our regional SME customers. At the same time, we will be able to offer TMB and IFCT customers our range of SME banking and capital market products and services.

Award-winning year in Investment Banking
Our end-to-end origination, intermediation and distribution capabilities differentiate DBS in Asia. We have strong access to retail, SME and corporate customers throughout the region. At the same time, DBS distributes securities and financial products through our ATMs, internet banking, DBS Vickers’ brokerage operations, private banking network, as well as through our traditional institutional coverage. We reach traditional institutional investors, high networth investors, as well as the aspiring mass affluent market. We reinforce our intermediation with regional expertise and leadership in equity capital markets, debt capital markets, loan syndication and treasury.

Earlier in the year, we improvised quickly and decisively in sourcing competitive funds on behalf of clients during the SARS outbreak. In one case, when we found ourselves grounded by quarantines and travel restrictions, we organised a virtual roadshow for the $684 million initial public offering for Singapore Post, the largest in Singapore last year. The international placement, subscribed by 10 times, drew interest from international institutional investors despite our inability to meet them physically. Our investment bankers conducted 80 hours of meetings in 11 days with 125 institutional investors from Hong Kong, Japan, Continental Europe, the United Kingdom, and the United States, through video-and telephone conferencing. The retail portion of the offering was 5.6 times subscribed, with 72% of the total retail offer covered by DBS ATMs and internet banking. The virtual roadshow helped the Singapore Post IPO win a 2003 deal of the year award from Institutional Investor magazine.

Throughout the year, DBS landed several high-profile deals in the region in competition with global and regional financial institutions.

Our efforts were recognised in the numerous awards and accolades from international and regional publications. The syndication team, in particular, became the first non-US bank to win the coveted IFR Asia’s Asian “Loan House of the Year” award and was commended by the regional magazine for “doing intelligent, high-profile structured transactions that add value to the development of the market.”

Following our introduction of real estate investment trusts (REITs) in Singapore for two prestigious Singapore clients, we launched the Fortune REIT, the first real estate investment trust for a Hong Kong issuer. This HK$906 million offering by the Cheung Kong group was 3.7 times subscribed, with 48% of demand covered by Asian retail investors.

We also brought our regional distribution capabilities, both institutional and retail, to the largest IPO in Southeast Asia in 2003, the IPO for Malaysia’s Astro All Asia Networks Plc, a global mandate where DBS featured as the only Asian Joint Bookrunner and Joint Lead Manager. This deal was awarded FinanceAsia’s “Country Deal 2003 (Malaysia).” We also applied our syndication muscle in arranging a US$230 million syndicated loan for Kumpulan Guthrie, and a $220 million leveraged buyout financing of the assets of SingTel’s Yellow Pages.

We were particularly successful in leading key mandates in the telecommunications, media and technology sector. The US$600 million financing for South Korea’s Hanaro Telecom was the largest sponsor-related telecoms financing in Asia ex-Japan for the year. DBS was also the lead manager for a US$400 million dual-tranche syndication for LG Philips LCD.

Our debt capital market team continued to top the Singapore dollar bond league table, managing the inaugural bond issues of Singapore Post, Senoko Power and SP PowerAssets. The latter raised in excess of $3.8 billion, one of the largest bond offerings out of Singapore.

In mergers and acquisitions, we leveraged our regional presence, multi-product expertise and financing capabilities to complete 38 transactions worth US$3.88 billion last year. Thomson Financial ranked DBS first by number of deals completed in Asia ex-Japan, and number six by value.

Extracting higher profitability from Consumer Banking
Although the home loan price war in Singapore abated towards the end of the year, interest margins remained slim as rates fell by as much as 150 basis points during the year. The first-year fixed rate for housing loans, for example, fell to 1.5%, down from 3% the year before.

In May, DBS introduced the innovative Mortgage 1-2-3 plan, which gives customers greater flexibility in repayment than standard home loans. The plan proved popular just as Singaporeans’ wages and their Central Provident Fund contributions were being cut.

DBS’ Singapore mortgage loans outstanding grew 7% in 2003, reversing the decline in 2002. Notably, DBS’ higher margin unsecured loan products registered strong growth. Credit cards receivables rose 24%, while Cashline receivables were up 62%.

We offered financial advisory services and tailored lifestyle financial products and services to meet the needs of our affluent and high networth customers. We now have more than 30,000 Treasures Priority Banking and Private Banking customers each in Singapore and Hong Kong serviced by dedicated relationship managers. Our business model emphasises service, flexibility and responsiveness.

In another successful consumer banking initiative, we launched in October a DBS-Amex Black Card targeted at young, upwardly mobile Singaporeans seeking an alternative to the traditional Gold Card. We received an overwhelming response, with some 50,000 applications in the first month of launch.

The consumer banking team also moved swiftly to tap opportunities in the region’s nascent budget airlines industry. We signed agreements with AirAsia, Malaysia’s low-fare carrier, and Singapore’s ValuAir, to provide them with co-branded credit cards as well as to manage their respective online payment processing operations.

Managing volatility at Treasury and Markets
DBS’ leadership position in all Singapore dollar treasury products, as well as in local currencies, is underpinned by our strong Moody’s Aa2 credit rating, capital base, balance sheet, customer base and distribution capabilities. Our customer flow business has been growing steadily in Singapore and Hong Kong with our continued penetration of the local SME and corporate banking markets. Today, our Treasury and Markets teams combine product structuring expertise and market knowledge to unbundle and mitigate risks, re-packaging products to suit the risk appetite of clients and specific investor classes.

Managing complex risks is key to the success of our treasury business which continues to chart an uptrend amid choppy financial market conditions.

Our treasury earnings maintained its momentum – income before operating expenses reached $828 million in 2003. There were three main drivers: increased customer business driven by higher market volatility, more active market-making activities, and strong wealth management sales.

To diversify from plain vanilla treasury products, our Treasury and Markets team covers a range of derivatives, including foreign exchange, credit, interest rate and equity. During the year, they stepped up customer marketing efforts in Hong Kong, Taiwan, South Korea and China.

In the credit derivatives arena, we completed a US$1 billion Collateralised Debt Obligation. DBS Asset Management acted as the collateral manager for the underlying portfolio, which was linked to 100 credit default swaps from a mix of European, North American and Asian borrowers.

During the year, we sold DBS-structured products to other banks, which in turn attached their own brands before final distribution. “White-labelling” will be an area of focus for DBS in the coming years.

Riding the market upturn in stockbroking and asset management
The upturn in regional stock markets gave a strong boost to DBS Vickers Securities and DBS Asset Management (DBSAM).

Fee and commission from DBS Vickers grew 42% to $169 million, marking the firm's highest contribution to Group fee income.

DBSAM, an award-winning fund manager, continued its expansion in Singapore, Malaysia and Hong Kong, targeting both retail and institutional investors. DBSAM actively manages 16 funds, and our funds are among the best-selling in Singapore and Malaysia. Despite the challenging conditions in financial markets in recent years, DBSAM tripled its assets under management to $10 billion from four years ago.

Setting quality standard in Technology and Operations
Quality customer service is impossible without strong, properly executed processes. Like many banking leaders, DBS faces the non-stop challenge of running its operational processes at lower cost and lower risk, while at the same time supporting the increasingly rapid introduction of new products and capabilities.

To strengthen our technology and operations capabilities, we merged two strategic functions last year – the Information
Technology and Processing and Servicing groups. The renamed Technology and Operations group now provides “one-stop shop” approach to all of the Group’s technological and operational needs.

During the year, we implemented a 10-year contract with IBM to outsource our network and mainframe technology functions without fanfare or incident. The technology outsourcing allows us to focus on value-add functions rather than maintenance activities. At the same time, we have access to the extended reach, capabilities and processes of a global service provider. Financial benefits continue to flow from synergies and lower procurement costs for hardware, software and other services.

The year also saw the implementation of Regional Processing Centres, with hub processing activities for three areas – trade (with its centralised hub in Hong Kong), remittances (Singapore) and treasury processing (Singapore). This regional initiative extended our economies of scale and led to a 13% improvement in staff productivity and an 11% reduction in unit costs for Group operations.

Our continued emphasis on quality is reflected in the prestigious “Singapore Quality Class” award from SPRING Singapore. This makes DBS one of the first organisations in Singapore to have its entire processing and servicing operations certified. The achievement underscores our relentless pursuit to improve performance through the adoption of the Six Sigma methodology of benchmarking processing and servicing functions.

Discipline in managing our resources
Despite our heavy investments over the years, we remained focused on managing our expenses. For 2003 we contained costs and headcount well below the level recorded in fourth quarter of 2001, the first full quarter following the Dao Heng Bank and DBS Vickers acquisitions.

Our operating expenses for 2003 were down 0.5% to $1.841 billion. Our cost-income ratio improved for the second consecutive year to 43.9% from 44.6% in 2002 and a high of 48.9% in 2001.

Making a difference in the communities we serve
The pneumonia virus outbreak in the region presented unusual demands on our business contingency plans. For the first time, we chose to activate our contingency plans ahead of any real disaster. We replicated key parts of our operations, splitting critical functions among different teams operating from different locations. We also initiated a series of programmes including waivers of charges, fund raising and dedicated customer hotlines, to help our customers, business partners, employees, and the community cope with the virus outbreak.

A crisis often has a way of bringing out the best in people. During the SARS outbreak, we were encouraged to see our staff, customers and business partners in Singapore and Hong Kong rallying to various causes initiated by the Bank to help those affected by the contagious virus, and to fund research into the disease. DBS raised funds for the Singapore SARS Clinical Consortium and the microbiology departments of The University of Hong Kong and The Chinese University of Hong Kong.

In addition to the cash donations, DBS set up dedicated hotlines in Singapore for patients and healthcare professionals working at Tan Tock Seng Hospital, Communicable Disease Centre and the Singapore General Hospital. Through the hotlines, patients and health care workers isolated in wards were able to conduct their banking business over the phone.

In Singapore and Hong Kong, DBS initiated other measures including waivers of late payment fees and charges for those in the frontline of the SARS battle, distribution of vitamins to customers, and new financing schemes for SME customers affected by the sudden and sharp downturn in business activity.

Corporate volunteerism has been an important focus since we introduced the DBS Volunteer Programme in July 2000 under which every employee gets two days off to perform volunteer work.

Last year, our employees in Singapore and Thailand joined hands to raise money for the Thai Danu School located at Thaton Village in Northern Thailand. The funds were used to build a much-needed water supply system for the school which has over 200 students from nearby tribes. DBS employees from Singapore and Thailand also visited the school in October, bearing computers, toys and clothes for the children, and helping to paint the school while there. Other employees also used their two days’ volunteerism leave to spend time with children from underprivileged homes in Singapore.

DBS was once again conferred the “Distinguished Patron of the Arts” award by The National Arts Council for its contributions to the arts, notably its patronage of the Singapore Repertory Theatre.

Asset quality
Reflecting the improving business climate, provisions started to moderate in the second half of 2003. For the full year, provisions declined slightly by 0.6%. But the second half provisions were 22% lower than the charges in the first half. We are cautiously optimistic that this trend should continue as DBS’ NPL rate has fallen to 5.2%, the lowest level since the 1997 Asian financial crisis.

Well capitalised, well reserved
Our continued leadership in the market would not be possible without a well-capitalised, well-reserved financial base. This strength, built on a capital adequacy ratio of 15.1% and a Moody's credit rating of Aa2, protects our customers' funds and assures our business counterparts, partners and stakeholders of our ability to fulfil our commitments.

We continue to strengthen our capital management. Our rate of internal generation of regulatory Tier 1 capital, or return on tangible equity, is now more than 20%.

We have established a reputation for financial soundness and probity, a reputation that we jealously guard amid growing investor dismay over the state of corporate governance at many internationally-renowned companies. Our shareholders, customers and employees can rest assured that DBS remains committed to a high level of service, corporate integrity and financial prudence.

Becoming a more competitive Asia-based bank
We have strengthened our leadership team over the years, adding specific expertise to supplement management breadth and depth. We have reduced downside risks by upgrading our risk management, technology and operations capabilities. We have strong positions in our core markets of Singapore and Hong Kong, and we are increasingly leveraging our capabilities into Greater China, Southeast Asia and South Asia. Our fully integrated DBS Hong Kong operation provides a strategic platform for growth in Greater China. Our end-to-end origination, intermediation and distribution capability, coupled with our Treasury and Markets expertise, differentiate us in Asia.

Our investments in people, products, systems, and geography over the years have transformed DBS into a more competitive Asia-based bank. We are confident that, as we continue to expand scale, distribution and customer access, we are well-positioned to tap the exciting growth opportunities that are emerging from the stronger economic prospects for Asia.