DBS Q3 falls on bad debts; to cut 900 jobs

People walk in the lobby of a DBS Bank building in Singapore November 7, 2008. DBS Group, Southeast Asia's biggest bank, said it will cut 6 percent of its staff after posting a bigger-than-expected 38 percent drop in quarterly profit as losses from bad debts quadrupled.

SINGAPORE (Reuters) - DBS Group, Southeast Asia's biggest bank, said it will cut 900 jobs, or 6 percent of its staff, after posting a bigger-than-expected drop in quarterly profit as losses from bad debts quadrupled.

DBS and its peers in Asia such as Bank of China, which largely escaped the credit market meltdown that crippled Western banks, are now hit by slowing economies, sliding property prices and a sharp fall in capital market activity.

DBS shares, which slumped nearly 9 percent in early trade after it said profits fell 38 percent, recovered to close up 2.7 percent. DBS shares have almost halved this year, falling more than its rivals.

"DBS confronts a challenging outlook -- we have a weak macroeconomic and credit cycle and brand damage from structured products," said Matthew Wilson, an analyst at Morgan Stanley in Singapore.

Richard Stanley, who took over as DBS chief executive in May after a career at Citibank, said 900 jobs, most of them in Singapore and Hong Kong, will be axed in a move to cut costs.

"The job cuts will be across businesses and functions and at all levels," he told a news conference. "The reasons for these cuts is to allow DBS to be a much leaner and more streamlined organisation for many years to come."

The job cuts were the biggest for the Singapore bank, which shed 200 staff in 2001. Crosstown rival United Overseas Bank said it would cut jobs only as a last resort, while Oversea-Chinese Banking Corp said cuts were not on its agenda.

Stanley said DBS will continue to review its costs and organisational structure, but was comfortable with its capital position after raising S$1.5 billion in May and its latest cost-cutting initiatives.

July-September net profit dropped to S$379 million ($253 million) from S$610 million a year ago. Analysts had predicted S$475 million, according to five forecasts compiled by Reuters.

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DBS took S$319 million ($213 million) impairments on bad debt, including general writedowns of S$129 million to cover losses from risky derivatives, and took a S$70 million charge for compensating customers for Lehman-linked structured products.

The bad loans have increased as clients lost money on stock market investments and from smaller-and-medium sized businesses struggling with the credit squeeze and economic slowdown.

The bank reduced risks on its balance sheet by taking more losses from debt derivatives. Its non-asset backed debt portfolio was written down by as much as 25 percent from 6 percent previously.

DBS had already written down 90 percent of its asset-backed securities, which suffered more due to a meltdown in the U.S. subprime mortgage market.

Analysts had expected DBS to take impairments of as much as S$200 million on corporate collateralised debt obligations.

The result came after smaller local rivals reported below-forecast earnings, hurt by writedowns on bad debts.

Second-ranked United Overseas Bank posted a 5 percent drop and Oversea-Chinese Banking Corp a 13 percent slide in third-quarter profit.

Strong loan growth was offset by lower interest rate margins due to a drop in Singapore rates.

Lending in the third quarter was up 22 percent from a year earlier, but net interest income rose only 2 percent to S$1.07 billion.

Credit Suisse warned in a report that Singapore's loan growth could collapse to zero next year.

Analysts have warned that the end of cheap credit, a downturn in the property market and a slowdown in exports could further increase banks' bad debt charges.

Merrill Lynch expects the non-performing loan (NPL) ratio for local banks to double to 3 percent by 2010.

"These results suggest we are nearing an inflection point for provisions as the credit cycle turns for the worse," said Merrill analyst Andrew Maule in a note after the results.