1QFY2009 net profit was S$552 mn, +27% QoQ, -15% YoY, vs. our forecast S$434 mn, largely due to better trading and investment gains, offset by higher loan loss provisions. A S$0.14 dividend was announced.

Positives: 1) Higher than expected S$172 mn in trading income and investment gains, partly comprising a disposal gain on sale of 2.7% stake in HDFC Bank; 2) Higher than expected NIM of 2.01% vs. 1.97%, on higher spreads partly helped by widening HK Prime-Hibor spreads, +25 bp QoQ, reduced funding costs, offset by lower interbank rates – the only Singapore bank to report higher NIMs QoQ; 3) Strong fee income, mainly on higher capital market activities; 4) Continued solid cost management, cost-to-income ratio fell to 35%; 5) HK profits improved 5% QoQ to S$99 mn, on higher NIM (up 3 bp) and lower provisions, SP for SME, and private banking customers down; 6) Strong AFS gains of S$752 mn, vs. 1Q’s S$392 mn loss.

Negatives: 1) Higher-than-expected loan provisions, 138 bp, vs. our 109 bp, general provisions kept high at 56 bp, similar to 1Q, SP were 83 bp, vs. 70 bp last quarter, reflection of higher NPLs, which rose to 2.8% vs. 1Q’s 2%. DBS attributes the spike mainly to shipping and Middle East corporate loans; asset quality in Singapore remains strong; 2) Loans fell 2% QoQ, though mainly due to S$ currency appreciation.

Notwithstanding strong trading and investment gains, the market is likely to be concerned over the deterioration in asset quality, and sharp rise in loan provision, in our view. DBS will be having its 2Q analyst briefing this evening – we are looking for further indications on the NPL outlook, whether stabilizing or more to come. We note these NPLs were largely in relation to loans outside core markets, Singapore and Hong Kong; in fact, HK NPLs improved to 2.4% in 2Q, while Singapore only rose marginally to 1.3%. Our price target is unchanged.