DBS 2Q09 net profits came in at S$552mn (+27% q/q), ahead of our (S$395mn) and street (S$455mn) estimates, driven by strong fee/trading income and resilient margins. The bank used the higher earnings cushion to continue to make significant provisions, especially GP.

Margins remain resilient: In-line with expectations, NIMs increased 2bps q/q, with HK NIMs likely driving the uptick. NII at S$1112mn was in-line with estimates. The only disappointing note here was a 2% sequential decline in the loan book.

Non-interest income strong: A healthy revival in flow-based businesses led to a 26% y/y increase in non-interest income. Fee based and trading businesses both trended upwards, and were largely responsible for the above-expectation result.

Provisioning remains high: Provisioning remained elevated at 35bps (not annualized – vs. 31bps last quarter), as the bank used the buffer provided by fee/trading gains to build loan loss reserves, with GP of S$183mn accounting for 40% of total quarterly provisions.

NPL ratio moves higher: A disappointing factor for DBS was an 80bps q/q increase in NPL ratio, which now stands at 2.8%. While provisioning remained high, total NPA coverage slipped to 81% (from 97%) last quarter, leading us to believe that provisions are likely to remain elevated through the year.

Cost control good: DBS CIR for the quarter came in at 35.2%, down 320bps sequentially, helped by positive jaws. Expenses declined 1% q/q, as operating profits rose 27% y/y and 13% q/q.

Capitalization remains strong: DBS tier 1 ratio came in at 12.6%, rising 100bps sequentially, but more meaningfully, up from 10% of last year.

Our stance: Overall, a strong set of numbers, though while ahead of estimates, were not entirely unexpected. Strong margins, and a revival in fee/trading income bodes well, while provisioning worries linger. As such, the stock may consolidate given its YTD outperformance of both STI and OCBC/UOB. We would buy on any dip.