DBS posted a bottom line of $295m (-22% q-o-q; -40% y-o-y) including one-time charges from staff restructuring and impairment costs. Excluding one-time items, net profit was $383m in 4Q08, slightly below our expectations of $391m. The variance was mainly due to weaker than expected fee-based income. The board proposed a fourth-quarter dividend of 14 cents per share over the enlarged share base.

Fee-based income fell 17% q-o-q due to continued deterioration in loan syndication (-35%) and wealth management (-51%). Net trading losses of $25m in 4Q08 were more than offset by a $104m-gain from the disposal of investment securities. Specific allowances for loans rose from $106m to $224m, led by SME loans in Hong Kong and China as well as private banking loans in Singapore and Hong Kong. General provisions slide as no additional coverage is provided for its CDO portfolio.

Loans rose 17% y-o-y led by strong draw downs from the B&C, housing and general commerce sectors. Fast growth in S$ loans enlarged DBS’s market share from 18% to 20% at end-2008. NIMs improved 5bps to 2.04% due to wider credit spreads on corporate and SME loan and better asset mix. An improved capital base following its recent $4bn rights issue, coupled with the government’s initiatives to underwrite more lending risks, well-positioned the group to strengthen its market dominance in lending.

Hong Kong’s earnings fell 79% q-o-q due to higher expenses and an 81% spike in provisions due to SMEs and private banking clients. For the full year, net profit in Hong Kong slumped 90% due to weak performance from all business segments while provisions escalate. The risk exposure to Hong Kong remains high given that 25% of its gross loans and 16.7% of its profits are derived from Hong Kong.

We have reduced our FY09 and FY10 earnings estimates by 15-20% to reflect higher provisions. Our target price is lowered to $10.10 based on FY09 BVPS. The weak economic outlook and earnings uncertainties ahead will likely continue to depress share price. Maintain Hold.