DBS Group Holdings, Singapore's largest bank, reported a 22 percent decline in its net profit in the second quarter compared to a year ago, as bad loans continued to climb. However, it beat market estimates and jumped from the previous quarter, which sent the bank's shares soaring on Thursday.

The bank said that the steep decline in profit comes as it set aside more money for bad loans as it expects several people and businesses to fail making loan payments in the coming months owing to the pandemic. Singapore banks' shares took a hit recently following a cap of their dividends last week by the country's central bank.

DBS Business Steadying

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DBS said that the steep decline in profit comes as it set aside more money for bad loans as it expects several people and businesses to fail making loan payments in the coming months owing to the pandemic Reuters

DBS Bank reported net profit of $912.9 million (1.25 billion Singapore dollars) in the April-to-June quarter, down from $116 million (1.6 billion Singapore dollars) a year ago. However, it beat Refinitiv estimates of around 1.19 billion Singapore dollars. The decline in profit comes on the heels of increasing bad loans as many companies hit by the pandemic ran out of business in the reported quarter. Provisions against bad loans in the second quarter surged to $849 million, up from $251 million in the year-ago quarter.

However, the bank said that bad loans were steady in the quarter and fee income was rising, which is a good sign that the economy is finally recovering. Also, loan loss allowances declined in the second quarter compared with the earlier quarter. Total allowances for loan losses amounted to $620 million (849 million Singapore dollars) in the second quarter, up from 251 million Singapore dollars a year ago.

Total income for the second quarter was largely flat at $3.73 billion compared with $3.71 billion in the year-ago quarter, with both net income and fee income falling from the same period a year ago.

Situation Improving With Economy Reopening

DBS Group
DBS Group's total income for the second quarter was largely flat at $3.73 billion compared with $3.71 billion in the year-ago quarter Reuters

DBS, which is the largest lender in Southeast Asia, said that the situation is improving and several fee income streams were improving from troughs in April as economies emerge from lockdowns. The bank although said it expects that several people and businesses will fail to pay loans because the coronavirus has hit them bad. This is one of the primary reasons behind setting aside more money for bad loans.

However, the bank also saw record deposit inflows in the first half, led by inflows from current accounts and savings accounts, and it expects the momentum to continue. Shares of Singapore banks have been taking a hit lately following a capping of their dividends last week by the central bank. DBS will pay a dividend of 18 cents per share for the second quarter, with the scrip dividend scheme applicable.

The bank will be issuing scrip dividends at the average of the closing price of its shares on Aug 14, 2020 and Aug 17, 2020. The move is in line with the guidance from the Monetary Authority of Singapore (MAS) for local banks to moderate their dividends for 2020. The bank had paid a dividend of 33 cents per share.

However, now that bad loans are steadying, it might help Singapore banks to bounce back in the next quarter. DBS now expects 5% growth in full year loans, led by non-trade corporate loans.