Record operating results attest to the quality of our franchise and nimble execution

We reported net profit of SGD 4.72 billion for 2020, 26% below the record in the previous year. There were two factors for the decline. Net interest income, which accounted for two-thirds of total income, fell 6% due to a lower net interest margin as central banks around the world cut interest rates in response to the Covid-19 pandemic. In addition, we more than quadrupled the amount of total allowances to SGD 3.07 billion as general allowances of SGD 1.71 billion were conservatively set aside for asset quality risks.

Despite the significant economic impact of the pandemic, business volumes for the year were higher or at least resilient, attesting to the quality of our broad-based franchise and nimble execution. Loans grew 4%, fee income was stable and Treasury Markets achieved a record year. We also realised a tripling in gains from investment securities in a government-bond portfolio intended to benefit when interest rates fell. The healthy business momentum together with a well-constructed balance sheet enabled us to offset the impact of lower interest rates, and total income remained stable at SGD 14.6 billion.

At the same time, expenses were 2% lower at SGD 6.16 billion as we kept costs in check. The cost-income ratio was one percentage point lower at 42%. Profit before allowances rose 2% to a new high of SGD 8.43 billion.

Strong business momentum despite economic slowdown

Net interest income declined 6% to SGD 9.08 billion due to a lower net interest margin, which fell 27 basis points to 1.62%. Given that the interest rate cuts were made in March, the majority of the net interest margin decline occurred in the second and third quarters. The lower interest rates set back full-year net interest income for the commercial book by SGD 1.78 billion compared to 2019.

Loan growth provided a partial offset to the impact of lower interest rates. Loans grew 4% or SGD 16 billion in constant-currency terms to SGD 371 billion, including SGD 2 billion from Lakshmi Vilas Bank (LVB), which was amalgamated on 27 November 2020.

Non-trade corporate loans grew 9% or SGD 19 billion to SGD 221 billion. The majority of the growth was to customers in Singapore, which included SGD 5 billion of government risk-sharing loans, followed by Hong Kong. By industry, the growth included tenanted commercial real estate at loan-to-value (LTV) ratios of around 65% and short-term facilities for major commodity firms.

Due to the sharp economic contraction between the first and second quarters that coincided with financial market dislocations, non-trade corporate loan growth was skewed to the first half as customers drew down short-term facilities to ensure sufficient liquidity in addition to longer-term borrowing. As the economy rebounded and financial markets stabilised from the third quarter, some of the short-term loans were repaid in the second half. The overall pipeline and underlying loan momentum were healthy over the course of the year.

Trade loans fell 13% or SGD 6 billion to SGD 38 billion. The decline occurred in the first quarter, when lower oil prices reduced transaction values, and the fourth quarter, when tighter pricing made trade loans less attractive to roll over.

Housing loans were little changed at SGD 74 billion. While new bookings were strong over the course of the year (with the exception of the second quarter, when the circuit-breaker was in effect), the impact was offset by higher repayments. Housing loans contracted in the second and third quarters and rose in the fourth quarter following strong bookings in the second half as market transactions picked up. Full-year bookings rose 28% to the highest since 2012, when cooling measures were first introduced.

We had record deposit inflows, which were sustained over the course of the year. In particular, current and savings accounts (Casa), which were lower cost, expanded 42% or SGD 99 billion to SGD 338 billion, enabling us to let go of more expensive fixed deposits. As a result, the Casa ratio improved from 59% to 73%. Total deposits grew 15% or SGD 61 billion to SGD 465 billion, including SGD 3 billion from LVB. With deposits growing faster than loans, the loan-deposit ratio fell from 89% to 80%.

While the fiscal stimulus and monetary easing pervading the year created the conditions, it was the strength of our deposit franchise that enabled the massive Casa inflows. Our digital capabilities entrenched our long-standing dominance in consumer savings deposits and strengthened a cash management franchise now recognised as among the best in the world. SGD and USD, our two principal currencies, each accounted for around half of the Casa inflows during the year. Our market share of total SGD deposits rose from 24% in 2019 to 27% as our share of current deposits rose from 16% to 21% while our share of savings deposits was maintained at 52%.

Excess deposits were placed with the central bank where they earned a lower spread than loans and resulted in a six-basis-point erosion in net interest margin. However, they added to net interest income and were accretive to return on equity (ROE) since central bank placements did not incur any risk weighting. With easy monetary conditions expected to persist, we aimed to maximise net interest income and ROE rather than net interest margin.

Net fee income was little changed at SGD 3.06 billion. A 14% increase in the first quarter to a quarterly record was offset by an 11% decline in the second quarter as transactions fell with lockdowns in the region. Fee income was stable in the second half compared to the previous year as economic activity rebounded from the second-quarter trough.

Wealth management fees grew 11% to a record SGD 1.43 billion, with the first and third quarters being the two highest on record. Demand for investment products increased with healthy risk appetite in the first quarter and improved market sentiment in a low interest rate environment in the second half. Brokerage commissions increased 31% to SGD 149 million with higher stock market volumes and a surge in new digital account openings helped by a streamlining of our stockbroking business. Loan-related fees were 2% higher at SGD 417 million.

These increases were offset by lower card and investment banking fees. Card fees fell 19% to SGD 641 million as they bottomed in the second quarter with a 34% decline from the year-ago period when economies in the region were locked down. The decline moderated to 21% in the third quarter and 12% in the fourth quarter even as spending on travel remained subdued. Investment banking fees were 31% lower at SGD 148 million with record fixed income fees more than offset by a fall in equity capital market activity. Transaction service fees were stable at SGD 746 million.

Other income rose 32% to a record SGD 2.46 billion. Investment gains tripled to SGD 963 million as bond portfolios performed strongly with falling interest rates. Trading income was at SGD 1.41 billion, the second highest on record, as treasury customer income rose to a new high.

By business unit, Consumer Banking/ Wealth Management income declined 8% to SGD 5.77 billion. The impact of lower interest rates as well as lower bancassurance and cards fees were moderated by higher income from loan and deposit growth and wealth management sales. Institutional Banking income declined 5% to SGD 5.75 billion as the impact of lower interest rates more than offset higher income from loans and treasury products. Treasury Markets income increased 54% to SGD 1.44 billion as market volatility created opportunities for trading.

Expenses were 2% lower at SGD 6.16 billion as general expenses such as for travel and advertising declined. Staff costs were little changed with an increase in base salaries due to a higher headcount offset by lower bonus accruals and by government grants. The cost-income ratio improved one percentage point to 42%.

Rigorous process to estimate credit costs

We carried out a stress test of the portfolio at the onset of the pandemic, analysing the loan book using two approaches as part of a corroborating process to ensure rigour. The first approach was a top-down view of the impact of macroeconomic variables on various loan portfolios. The second was a bottom-up analysis using various stress assumptions on individual borrowers or portfolios. A base scenario and stress scenario were used for each approach. We identified the unsecured consumer and SME portfolios as being more vulnerable, together with large corporates in several industries including oil and gas. The stress tests derived estimated credit costs of SGD 3 billion-5 billion, or 80-130 basis points of loans, over 2020-21. The estimate was in line with two-year credit costs during past economic crises. The estimate was revalidated in a second exercise later in the year.

Unsecured consumer loans, which have historically been a small part of the portfolio, amounted to SGD 5 billion or 1% of total loans. More than half were in Singapore, where borrowing limits were halved over the past four years, which meant that riskier exposures had been removed. In Hong Kong, the next largest exposure, the portfolio had been under stress in recent years and we had already taken some allowances for it.

Housing loans, which formed the majority of the consumer portfolio, were expected to remain healthy. A combination of conservative lending standards and LTV well below regulatory thresholds conferred significant resilience on the portfolio.

For SME loans, which amounted to SGD 41 billion or 11% of total loans, borrowers in Singapore and Hong Kong accounted for 90% of a portfolio that was largely secured by property with conservative LTV.

For large corporate loans, we identified several sectors that were more vulnerable. For each industry, we used conditions specific to the industry to carry out the stress tests. The largest vulnerable exposure was to oil and gas, which was stressed using oil prices at USD 20 per barrel while keeping borrowers’ operating costs fixed. Among the segments in this sector, support services were estimated to continue being the most vulnerable. While we had already conservatively recognised three-fifths of our support services exposure as NPA and taken appropriate allowances in 2017, the pandemic had worsened its fragility. As a result, we expected that more allowances were needed for this segment.

Conservatively front-loaded credit costs by taking SGD 3.07 billion in total allowances in 2020

We took a conservative approach and front- loaded the two-year estimated credit costs by taking general allowances of SGD 1.71 billion in 2020. As a result, general allowance reserves increased 72% to SGD 4.31 billion, 42% above the MAS minimum requirement. The reserves also exceeded the maximum amount eligible for consideration as Tier 2 capital by SGD 1.5 billion, forming a buffer that can absorb losses without impacting capital adequacy ratios.

Specific allowances nearly doubled to SGD 1.35 billion or 31 basis point of loans. As was to be expected, new NPA formation increased as the number of defaults rose across the region with the economic slowdown. After recoveries and write-offs, NPA increased 16% to SGD 6.69 billion and the NPL rate rose slightly to 1.6%, which was within the range of recent years.

Total allowances more than quadrupled to SGD 3.07 billion, exceeding the low-end of the SGD 3 billion-5 billion range. Total allowance reserves increased 46% to SGD 7.33 billion and the allowance coverage was at 110% and at 206% after considering collateral of SGD 3.12 billion.

The initial round of government loan moratoriums in Singapore, which had involved repayment holidays either for the principal or for both principal and interest, expired at year-end. They were replaced by more restricted relief measures requiring partial repayments. Compared to the initial moratoriums, the take-up rates for the new schemes fell to 10% for housing loan and 25% for SME customers as at January 2021. In Hong Kong, where the moratoriums were extended to mid-2021, loans under moratorium to large-corporate and SME customers were half their peak. Delinquency rates for the portfolios not under moratorium were also low.

Capital ratios remain strong

Our capital adequacy ratios remained strong. The Common Equity Tier 1 ratio was little changed at 13.9% as loan growth was offset by capital accretion. The ratio was well above regulatory requirements as well as the management operating range of 12.5-13.5%.

During the year we issued USD 1 billion of Additional Tier 1 (AT1) perpetual capital securities with a yield of 3.30%. These were the lowest-yielding USD AT1 instruments ever priced under Basel III and were 30 basis-points lower than the previous global record, which was held by our USD 750 million AT1 issuance in 2016.

Total shareholder returns

Our share price declined 3% during the year. A sharp fall in February and March was clawed back in the subsequent months, a pattern that mirrored global equity markets. The share price outperformed the Straits Times Index, which ended the year 12% lower.

For the calendar year, we paid out a dividend of SGD 1.02 per share. We paid out SGD 33 cents per share for fourth-quarter 2019 and first-quarter 2020. In July the Monetary Authority of Singapore called on local banks to limit their dividend to 60% of their previous level, which restricted our dividend for the second and third quarters of 2020 to SGD 18 cents per share.

As a result we delivered total shareholder returns of 1%, comprising the share price movement and dividend during the calendar year.

Lakshmi Vilas Bank (LVB)

The amalgamation of LVB complements DBS’ digibank strategy with an expanded network of 600 branches and 1,000 ATMs, an additional two million retail and 125,000 non-retail customers, as well as a strengthened deposit franchise. It also accelerates our growth trajectory in a key emerging market and gives us a more balanced geographical mix between northern and southern Asia outside of Singapore. Once the integration is complete, customers will be able to access our products and services, including the digital banking services that have won global accolades.

The provisional goodwill from amalgamation of Lakshmi Vilas bank was SGD 153 million, being the difference between the fair value of its assets and liabilities of SGD 3.89 billion and SGD 4.04 billion respectively. Total loans transferred amounted to SGD 2.14 billion, including net non-performing loans of SGD 212 million. Additional general allowances were set aside at group level to pre-emptively build up general allowance reserves to 9.5% of LVB’s performing loans. While there had been petitions filed by holders of equity shares and Tier-2 bonds, these petitions have been targeted against the Scheme of Amalgamation approved by the Government of India and the Reserve Bank of India and would not have direct risk implications for DBS India. We also made suitable provisions for legal liabilities in the normal course of business.

Outlook

We closed 2020 on an encouraging note. Business momentum was healthy, with loan growth more broad-based in the fourth quarter than the previous two while fee income remained resilient. The pipeline for loans and the outlook for several fee income streams as we enter 2021 are healthy. At the same time, asset quality trends have not been as severe as expected. If two-year credit costs come in around the middle of the SGD 3 billion-5 billion range, and having taken SGD 3.07 billion already, allowance charges in 2021 would revert to normalised levels. If these assumptions play out, earnings will be higher in the coming year.

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(A) Digitalisation
The number of digital customers in the Consumer and SME businesses in Singapore and Hong Kong increased by 11% or 0.4 million during the year to 3.7 million, with digital adoption accelerating during Covid-19 lockdowns. As a result, the proportion of digital customers rose to 57% from 52% in 2019, 48% in 2018 and 42% in 2017 due to new customer acquisition and customer migration from the traditional segment.

A typical digital customer continued to generate more than twice as much revenue as a traditional customer. A digital customer’s revenue was also more resilient because of greater product diversification and a higher number of transactions. The cost-income ratio of the digital segment was 30 percentage points below the traditional segment, with the differential widening from 20 percentage points in 2019. The ROE differential was maintained at 11 percentage points.

The reported cost-income ratio of the overall business increased five percentage points to 44% due to a lower net interest margin. On an underlying basis, including normalising for the decline in net interest margin, the cost-income ratio improved one percentage point to 44% due to lower costs.

(B) Business unit performance
Resilient business momentum offset the impact of lower interest rates across the various business units.

Consumer Banking/ Wealth Management total income declined 8% to SGD 5.77 billion. The impact of lower interest rates as well as lower bancassurance and cards fees were moderated by higher income from loan and deposit growth and wealth management sales. Expenses were stable at SGD 3.29 billion. Total allowances almost doubled to SGD 456 million from higher general and specific allowances.

Institutional Banking income declined 5% to SGD 5.75 billion as the impact of lower interest rates more than offset higher income from loans and treasury customer flows. Expenses were stable at SGD 1.99 billion. Total allowances increased to SGD 1.49 billion due to higher general and specific allowances.

Treasury Markets income increased 54% to SGD 1.44 billion due to higher contributions from interest rate, equity, foreign exchange and credit activities. Expenses rose 3% to SGD 634 million.

The Others segment encompasses the results of corporate decisions that are not attributed to business segments as well as the contribution of LVB as its activities have not been aligned with the Group’s segment definitions. The segment includes earnings on capital deployed into high quality assets, earnings from non-core asset sales and certain other head office items such as centrally raised allowances. Total income rose 33% to SGD 1.64 billion as higher gains on investment securities more than offset lower net interest income from the deployment of shareholders’ funds. Total allowances amounted to SGD 1.11 billion as higher general allowances were conservatively set aside.

(C) Net interest income
Net interest income declined 6% to SGD 9.08 billion.

Net interest margin fell 27 basis points to 1.62%. Benchmark interest rates used for pricing loans declined as central banks aggressively cut them. Most of the margin pressure occurred in the second and third quarters.

In constant-currency terms, gross loans rose 4% or SGD 16 billion to SGD 378 billion, including SGD 2 billion from LVB. The increase was led by a 9% or SGD 19 billion increase in non-trade corporate loans led by Singapore and Hong Kong customers. Trade loans fell 13% or SGD 6 billion. Consumer loans were little changed as housing loans were stable.

In constant-currency terms, deposits rose by a record 15% or SGD 61 billion to SGD 465 billion, including SGD 3 billion from LVB. Casa deposits grew SGD 99 billion, enabling more expensive fixed deposits to be let go. As a result, the Casa mix rose from 59% to 73%. Our market share of total SGD deposits increased three percentage points to 27% as our share of current deposits grew five percentage points to 21% while our share of savings deposits was maintained at 52%.

(D) Non-interest income
Net fee income was little changed at SGD 3.06 billion.

Wealth management fees grew 11% to a record SGD 1.43 billion, with the first and third quarters being the two highest on record. Demand for investment products increased with healthy risk appetite in the first quarter and improved market sentiment in a low interest rate environment in the second half. Brokerage commissions increased 31% to SGD 149 million with higher stock market volumes and new digital account openings. Loan-related fees were 2% higher at SGD 417 million.

These increases were offset by lower card and investment banking fees. Card fees fell 19% to SGD 641 million as they bottomed in the second quarter with a 34% decline from the year-ago period and progressively recovered in the second half. Investment banking fees were 31% lower at SGD 148 million as record fixed income fees were more than offset by a fall in equity capital market activity. Transaction service fees were stable at SGD 746 million.

Other non-interest income rose 32% to a record SGD 2.46 billion. Investment gains tripled to SGD 963 million as bond portfolios performed strongly with falling rates. Trading income was SGD 1.41 billion, the second highest on record, as treasury customer income rose to a new high.

(E) Expenses
Expenses were 2% lower at SGD 6.16 billion as spending on general expenses such as for travel and advertising declined. Staff costs were little changed with an increase in base salaries due to a higher headcount offset by lower bonus accruals and by government grants. The cost-income ratio improved one percentage point to 42%.

(F) Asset quality and allowances
New non-performing asset formation increased as the number of defaults rose across the region with the economic slowdown. After recoveries and write-offs, NPA increased 16% to SGD 6.69 billion and the NPL rate rose slightly to 1.6%, which was within the range of recent years. Specific allowances nearly doubled to SGD 1.35 billion or 31 basis points of loans.

We took a conservative approach and front- loaded the two-year estimated credit costs by taking general allowances of SGD 1.71 billion in 2020. As a result, general allowance reserves increased 72% to SGD 4.31 billion, 42% above the MAS minimum requirement. The reserves also exceeded the maximum amount eligible for consideration as Tier 2 capital by SGD 1.5 billion.

Total allowances more than quadrupled to SGD 3.07 billion, exceeding the low-end of the SGD 3 billion-5 billion range. Total allowance reserves increased 46% to SGD 7.33 billion and the allowance coverage was at 110% and at 206% after considering collateral.