Results in line with expectations. DBS reported 2Q12 net profit of S$810m, up 10% YoY and down 13% QoQ. This is close to consensus expectation of S$807m. The YoY earnings strength was due to a 10% rise in net interest income, and the sequential earnings decline was due to the strong 1Q12 trading gains. We will review our earnings forecast and target price after the analyst briefing later today. We do not see any catalyst that will drive DBS share price higher after the ~27% YTD share price rise. Our NEUTRAL recommendation is likely to be unchanged. 

NIM squeeze was evident. Net interest income was down 1% QoQ, due to NIM declining 5 bps QoQ to 1.72%.  Loans expanded 4% QoQ, led by regional corporate borrowing. Singapore housing loan also expanded. In terms of currency, US$ loans expanded the strongest 6.4% QoQ, ahead of S$ loans' growth of 2.8%. We believe the slowdown in loan growth and NIM compression will make DBS less attractive to investors.
 

Bulk of decline in non-interest income came from weakness in trading gains. Non-interest income fell 24% or S$199m QoQ. Trading gains collapsed 57% or S$186m QoQ to S$139m. Stockbroking commissions, investment banking and wealth management fees also recorded declines.

Higher cost-income ratio. The cost-income ratio of 44.8% is higher than 1Q12's 41.7%. This was the consequence of income falling more than expenses sequentially.  On a YoY  basis,costs were 9% higher from higher headcount and operating expenses to support higher business volumes.

Allowances of S$104m were 28% lower QoQ. This comprised S$64m general allowances and S$40m specific allowances.  We will lower our FY12 allowances expectations to factor this lower 2Q12 allowances.  

DBS declared a 1H12 dividend of 28S'' per share, unchanged YoY. The scrip dividend scheme will be applicable to the dividend.

Source: OSK