DBS Group Holdings Ltd
SGX:D05
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DBS Group Holdings Ltd
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Okay, good morning everyone and welcome to DBS' third quarter financial results briefing. This morning we announced third quarter net profit of $1.41 billion. This was achieved on the back of record income of $3.38 billion. And notably our 9 months ROE is at its highest in about a decade. So to tell us more we have with us our CEO Piyush Gupta; as well as our CFO Chng Sok Hui. Without further ado, Sok Hui please.
Good morning everyone and welcome to our third quarter's results briefing. We achieved record income of $3.38 billion for the third quarter, up 10% from a year ago and 5% from the previous quarter helped by sustained loan growth, fee income trends and net interest margin progression. Third quarter total income surpassed the earlier high of the first quarter with exceptionally buoyant markets and a property disposal gain have boosted non-interest income. Business momentum for consumer banking and wealth management as well as institutional banking continued to be strong.
Consumer banking and wealth management's year-on-year income growth increased from 20% in the first half to 23% in the third quarter, while institutional banking doubled from 6% to 12%. The underlying cost to income ratio excluding cost for our 50th anniversary staff bonus and other nonrecurring items was 43%, in line with first half 2018. Net profit was at $1.41 billion, up 72% from a year ago when accelerated allowances for oil and gas support exposures have been taken.
Net profit was up 3% from the previous quarter. For the 9 months, net profit increased 36% to $4.31 billion. Return on equity improved 3 percentage points to 12.4% from a higher net interest margin, normalization of allowances and a more efficient capital base. Total income reached a new high of $9.94 billion, led by a 16% increase in net interest income and 8% rise in fee income. The cost to income ratio was stable at 43%.
The balance sheet remains healthy. Nonperforming assets formation continued to be moderate, while specific provisions of 18 basis points for the 9 months was around normalized levels. Capital and liquidity ratios remained well above regulatory requirements.
Compared to a year ago, third quarter total income rose 10% to $3.38 billion, while net profit increased 72% to $1.41 billion. Net interest income grew 15% to $2.27 billion. Net interest margin increased 13 basis points to 1.86% in line with higher interest rates in Singapore and Hong Kong. Loans expanded 8%, led by consumer and non-trade corporate loan growth. Fee income was 1% higher at $695 million. Increases in fees for cards, wealth management and transaction services were offset by 2/3 decline in investment banking.
Other non-interest income rose 2% to $407 million. Higher trading gains and treasury customer income was offset by decline in gains from investment securities. Underlying expenses rose 15% of which ANZ accounted for around 6 percentage points. Business as usual expenses increased 9%. The year-on-year increase has been affected by loan base a year ago when the cost to income ratio of 41% was materially below the 43% we have been guiding for.
The current quarter's underlying cost to income ratio of 43% is in line with first half 2018 and with our guidance. Total allowances fell $579 million to $236 million as they normalized from last year's charges for oil and gas support for this exposure. Compared to the previous quarter, third quarter total income rose 5% or $172 million as net interest income and trading income increased.
Net interest income rose 2%. Non-trade corporate and consumer loans grew 2% which were partially offset by a 6% decline in trade loans as maturing exposures will not roll over due to unattractive pricing. Net interest margin of 1.86% was 1 basis point higher. Fee income was 2% lower as investment banking and wealth management fees fell in a weaker market environment. The declines were moderated by an increase in loan-related fees.
Other non-interest income was 49% higher as trading income rose 56% from the previous quarter's weak performance. Underlying expenses rose 3% compared to the 5% increase in total income. Profit before allowances was 6% higher. Total allowances were $131 million higher as there had been a specific allowance write-back in the previous quarter.
For the 9 months total income grew 12% or $1.07 billion to a new high of $9.94 billion. Net interest income gained 16% to $6.63 billion. Net interest margin increased 11 basis points to 1.85% in line with higher interest rates while loans expanded 8%. Fee income rose 8% to $2.15 billion from higher wealth management and card fees which were partially offset by lower investment banking fees.
Other non-interest income fell 2% to $1.17 billion. An increase in net trading income and a property disposal gain of $86 million in Hong Kong was offset by lower gains on investment securities. By business unit, consumer banking and wealth management income rose 21% to $4.20 billion from increases in all key product categories while institutional banking's income grew 8% to $4.26 billion, driven by cash management. Treasury market's income declined 12% to $518 million.
Expenses rose 14% to $4.30 billion. Excluding ANZ expenses was 8% higher. The cost to income ratio was 43%, in line with a year ago. Profit before allowances increased 11% to $5.64 billion. Total allowances fell $814 million to $505 million. Specific allowances were 1/5 the level a year ago as new nonperforming asset formation declined.
This quarter we begin the disclosure of net interest margin excluding treasury markets to show the NIM of our customer lending and funding franchises. This underlying NIM rose steadily by accumulated 17 basis points in the last year and by 3 basis points in the third quarter to 2.08%. Higher interest rates boosted the underlying NIM by 4 basis points as loan yields rose faster than deposit cost in Singapore and Hong Kong.
The increase was moderated by a 1 basis point decline from the full period impact of tier 2 issuances in the second quarter. The 3 basis point increase in the underlying NIM was offset by a drag in treasury markets NIM; 2/3 of the drag was due to swap accounting when what would have been deemed as net interest income is classified as non-interest income under swap accounting rules. The other 1/3 was due to lower [indiscernible] income and compression of NIM in the fixed rate securities portfolio as funding costs rose.
Were it not for the accounting [ tax ] in the [ TNM ] NIM, the interest income would have increased by 4% quarter-on-quarter instead of the reported 2%. We're expecting reported fourth quarter NIM to be at 1.86% to 1.87%. For 2019 we expect continued NIM progression from a higher interest rate environment.
This chart shows loan growth in constant currency terms. Non-trade corporate and consumer loans grew 2% or $6 billion during the quarter, sustaining the momentum of previous quarters. Non-trade corporate loans grew 3% or $5.6 billion, while Singapore housing loans rose 1% or $0.4 billion. For the year-to-date, non-trade corporate and consumer loans grew 6% or $18 billion over the 9 months. Non-trade corporate loans grew 9% or $15 billion, while consumer loans grew 3% or $3 billion. The growth in non-trade corporate loans was broad-based across the regions, led by Singapore and Hong Kong.
Trade loan pricing continued to be unattractive during the quarter as we had indicated at the previous quarter's briefing. As such we have been disciplined in letting maturing deposits run off resulting in a 6% or $3 billion decline during this quarter. For the year-to-date trade loans fell 5% or $2 billion. For the fourth quarter we expect non-trade corporate and consumer loan growth to continue. However, trade loan movements will remain dependent on pricing. For 2019 we are expecting loan growth to be in the mid single digits.
Deposits were unchanged from the previous quarter at $388 billion. Savings deposits across all main currencies is stable. Current accounts declined moderately which was offset by an increase in fixed deposits. Singapore dollar and U.S. dollar Casa deposit costs are stable. [Indiscernible] fixed deposit costs were higher resulting in a 10 basis points increase in overall deposit cost during the quarter. The increase was less than the 17 basis point increase in loan yields. Our liquidity ratios remain well above regulatory requirements. The liquidity coverage ratio was at 132%, while the net stable funding ratio was at 109%.
Compared to a year ago, third quarter gross fee income was 4% higher at $823 million due to growth in a wide range of activities. Card fees increased 33% to $185 million from higher customer transactions and the consolidation of the retail and wealth management business of ANZ. Wealth management fees grew 7% to $292 million as higher banker income was moderated by lower investment sales income.
Loan-related fees increased 10% to $110 million with a higher number of dues. Transaction service fees rose 5% to $162 million from a 12% increase in cash management fees. The growth from these activities was moderated by low investment banking fees which declined 66% on year due to fewer dues. Compared to the previous quarter gross fee income was 1% higher with increase in loan-related fees offset by lower investment banking and wealth management fees. For the 9 months, gross fee income grew 10% to $2.49 billion led by an increase in wealth management and card fees.
Business segments performance. Consumer banking and wealth management total income for the 9 months increased 21% to a record $4.2 billion. The growth accelerated from 17% in the first quarter to 23% in the second and third quarters. Loan and deposit income rose 23% to $2.39 billion from volume growth and higher net interest margin. Investment ForEx grew 17% to $1.1 billion as [ Banca ] sales and investment product sales grew, partly due to the consolidation of ANZ. Card income rose 27% to $568 million from higher credit card transactions as well as the consolidation of ANZ.
Wealth management customer segment income grew 29% to $2.03 billion as assets under management rose 13% to $220 billion including $22 billion from ANZ. Income from the retail customer segment increased 15% to $2.18 billion. Our market share in Singapore housing loans was maintained at 31%, while our market share of Singapore dollar savings deposits rose to 53% during the quarter. Institutional banking's 9 month total income rose 8% to $4.26 billion. Like the consumer banking, the growth accelerated over the course of the year from 3% in the first quarter and 9% in the second to 12% in the third.
Cash management was the largest contributor to growth as its income increased 54% to $1.21 billion. Deposits rose 5% and net interest margin was higher. Euromoney Magazine recently ranked us as the third largest in global market share for cash management services to non-financial institutions. We were also named the first in customer satisfaction by these institutions. Treasury customer income also increased during the 9 months by 6%. The growth in cash and treasury income more than offset declines in loan and trade income.
The acceleration in consumer banking and wealth management as well as institutional banking's income growth of the past few quarters can be clearly seen on this chart. The year-on-year growth for the 2 businesses combined was $239 million in the first quarter, $382 million in the second quarter and $429 million in the third quarter. For consumer banking and wealth management, the increased rate of loan of growth is from higher net interest margin wealth management as well as the consolidation of ANZ. For institutional banking it is from cash management and treasury customer income.
Treasury markets trading income shown by the red bar segment doubled from the previous quarter to $224 million which was more in line with recent quarterly averages. The previous quarter's performance had been affected by a widening of credit spreads which reversed during the quarter. Treasury customer income shown by the beige bar and is recorded under consumer banking and wealth and institutional banking fell 3% from the previous quarter to $303 million. It was 9% higher than a year ago as activity from both [indiscernible] and wealth management customers increased.
For the 9 months, treasury markets trading income fell 12% to $518 million. This was offset by an 8% increase in treasury customer income to $938 million. Total treasury income was stable at $1.52 billion. Third quarter expenses of $1.48 billion included cost of 50th anniversary staff bonus and other nonrecurring items. If these items were excluded, underlying expenses increased 3% from the previous quarter below the 5% increase in total income. Compared to a year ago, underlying expenses were 15% higher. The double-digit increase was due to a few factors. First, the consolidation of ANZ added about 6 percentage points of cost increase. Excluding ANZ, underlying expenses grew 9%.
Second, we hired new staff for income-generating positions including wealth management relationship managers and bancassurance sales. Third, the cost-base had been unusually low in the third quarter of 2017 when bonus accruals were curtailed -- accelerated allowances were taken for oil and gas exposures. As a result, the cost to income ratio a year ago was 41%, materially below our usual levels. This quarter's underlying cost to income ratio reverted to 43%, in line with the first half and our guidance for the full year.
Hong Kong's deposit 9 months earnings rose to $1.03 billion as total income increased to $2.04 billion, both at new highs. Excluding the property disposal gain of $86 million in the first quarter, both total income and earnings were also at record. Total income rose 25% in constant currency terms to $1.96 billion, while earnings were 31% higher at $947 million. Total income in the third quarter of $672 million was a quarterly record when previous property gains were excluded. The increase in 9 month total income was broad-based. Net interest income rose 32% to $1.33 billion.
Loans grew 16% from corporate lending and the consolidation of ANZ. Deposits increased 13% with current and savings accounts accounting for 59% of deposits. The high Casa base resulted in a faster re-pricing of loans and deposits as HIBOR rose over the year. This resulted in a 24 basis points increase in net interest margin in Hong Kong to 1.97%. Fee income rose 10% to $469 million, led by wealth management and cash management. Excluding the first quarter property gain, other non-interest income improved 24% to $159 million from higher treasury customer sales and trading gains.
Expenses rose 18% to $783 million with the increase due partly to the consolidation of ANZ. Excluding the property gain, profit before allowances rose 30% to $1.17 billion. Total allowances of $41 million were 19% more than a year ago because of specific allowances write-backs last year.
From this quarter, we are disclosing NPA movements for institutional banking and consumer banking separately for better clarity. New nonperforming asset formation for institutional banking continued to be moderate during the quarter at $233 million. Upgrade settlements, recoveries and write-offs were less than new NPA formation resulting in a small net NPA increase of $69 million.
For consumer banking and wealth management, there was a net NPA decline of $17 million during the quarter. Consumer banking's numbers has been consolidated into a single net line because the majority of the movements involve credit card or unsecured loans. As a portion of such loan repayments are routinely late, they are initially recorded as new NPA formation and then reversed as recoveries in subsequent quarters when they're repaid.
The gross movements therefore mask the actual NPA trend. For the group, the overall NPA of $5.90 billion as well as the NPA rate of 1.6% was stable from the previous quarter. Specific allowances remain around normalized levels at 21 basis points of average loans. Specific allowances were higher than the previous quarter when there had been a write-back for a significant oil and gas support service exposure.
The expected credit loss of stage 1 and 2 of general allowances was little changed from the previous quarter at $2.59 billion with an increase of $9 million for loan growth and migration between stages 1 and 2 net of transfers to specific allowances. This amount was taken through the profit and loss account. The charge was partially offset by negative $7 million of translation effects which was taken through the balance sheet.
The MAS 1% requirement for general allowances rose $27 million from the previous quarter to $2.9 billion due to loan growth. The shortfall between the 1% requirement and the expected credit loss of stage 1 and 2 resulted in a regulatory loss allowance reserve of $311 million, an increase of $25 million from the previous quarter. The amount was transferred from retained earnings.
Our capital ratios remain strong. The common equity tier 1 ratio was 13.3%, 0.3 percentage points below the previous quarter due to the interim dividend payout of $1.54 billion in August. The leverage ratio of 7.1% was more than twice the regulatory minimum of 3%.
To summarize, business momentum was sustained in the third quarter with continued loan growth, healthy fee income trends and net interest margin progression. As a result, total income reached a quarterly high even as market sentiment was weaker. The business momentum has been reflected in the acceleration of consumer banking, wealth management as well as institutional banking fee on year income growth. The strong growth underpin the record earnings per share achieved for the 9 months.
Equally important, the earnings growth has been accompanied by higher returns. Return on equity for the 9 months rose 3 percentage points from a year ago to 12.4%, the best in more than a decade. It demonstrated the improved structural profitability of our franchise as interest rates and allowance are normalized. They're well-positioned to capitalize on the region's long term prospects for navigating short-term uncertainties.
Thank you for your attention. I'll now pass it over to Piyush.
Thanks Sok Hui. As usual, I have a few comments and observations. Actually they're all on this one slide. So the headline that says we think there's a modest slowdown, I'm going to talk a little bit about macroeconomic conditions and what we're seeing, but by and large we think the outlook for next year continues to be quite favorable. We think we should be able to continue to grow our business in a sustained way, and we also think that margins are going to continue to improve which means that our overall returns should continue to prosper into 2019.
Specifically if you look at our third quarter performance, we are actually quite pleased that our income and our results continue to show a very sustained franchise strength. Sok Hui pointed out that the consumer banking income has been improving quarter by quarter, so 17% first quarter and 23% growth and 23% growth. And [ IBG ] income has also improved. It has gone up from about 6% growth in the first quarter to 12% growth in the third quarter.
So you can see the sustained growth in the income drivers. Our non-trade loan book continues to grow quite nicely. We're up $6 billion for the quarter, there's 2 percentage points of growth in non-trade loan. That was fairly broad-based across multiple business lines.
Our fee income trends are quite strong. So wealth management, cards, loan fees et cetera are quite strong. Obviously for the quarter the markets related fee activity was soft, so investment banking because headlines were affected in that. ECM business was soft. Brokerage stuff was a bit -- a little bit of -- a tad of a slowdown in wealth, but overall our fee income lines continue to be quite strong.
And therefore our own assessment is that we'll come in at 12.23% ROE this year. We think we should be able to post 13% ROE next year, consistent with our guidance. Where would that come from? We think the NIM trends will continue to be the same, I'm going to come back to that later in my comments, we think our cost to income ratio trajectory is -- continues to be per guidance. It's a little bit on the high side this quarter and that's because of one-offs. So we paid large staff bonus for the 50th anniversary, we launched a Live More, Bank Less campaign, so we're going to do that again.
We had some accruals we had to take for our old litigation case, but they're all one time. So we think our cost to income ratio is actually still pretty consistent with where we wanted to be. And again I'll talk about it. We think specific provisions will continue to be at the 2-cycle average, so we're fairly confident about the prospects for next year on that account. A quick comment on the macroeconomic front; frankly there's a lot of angst and anxiety around trade war, trade war tensions.
You can see some early slowdown in PMIs in a number of countries across the region. But our own sense is that the direct impact of the trade war on the macro economies will not be as material as people worry, and one reason for that is we think the supply chains are very hard to dislocate. Our own sense is that the technology supply chains cannot be shifted around in anything less than 3 or 4 years, and even the non-technology supply chains, well, they're somewhat easier to move.
You've got to understand that if you're going to move $200 billion or $400 billion of productive capacity out of China to other countries, you've got to get land and people and train people and hire people. This doesn't happen overnight. And frankly if it -- some portion of it does shift out of China, we think a large part of that will stay within the region, and move to Vietnam and Thailand and Indonesia and Malaysia. So from a regional context, it's not clear to us what the direct impact of the trade war will be as material as people think. There will be some of course, but it's not that worrying to me.
I think what is more worrying obviously is the impact of market sentiment, the indirect impact of the trade war and you can see that with the risk of trade equity sell down, currency weakness and so on that obviously has some impact on [indiscernible] and that might flow back into the real economy. That's harder to get your hands around. But net-net, we still think that Asia next year will continue to grow and China has got 6% if not 6.5%, and India has got growth, Indonesia has got growth. I think it'd still be in a growing part of the world, so that should be positive.
China deleveraging continues to be a concern, so even though they're taking their foot of the accelerator, they pump liquidity in in the last couple of quarters, but specific to individual cases and individual sectors, there'd still be great discipline about trying to squeeze a leverage out. And so you will continue to see reduced impact in risk in NIMs.
I think there will be bond defaults, continued bond defaults into next year and that might have some impact overall in terms of Chinese growth. But again we don't think it's going to be significant. So the macroeconomic environment therefore I think it will moderate a little bit, but I don't think it's going to materially dislocate business proposition and possibilities. Specifically on rates, it's kind of hard to call right now. The fed dot lots are still -- have seen rate hikes. I think the market -- the future market in our pricing is closer to 2 than to 3.
A whole bunch of other economists including our own house economists actually is still calling for rate hikes, in the U.S. it is so strong that the fed will have to disregard everything else and continue to hike rate. So anything from 2 to 2 rate hikes. The fact is though that the rate hikes will create an environment of continued U.S. dollar strength. And continued U.S. dollar strength means that there will continue to be relatively high pass-through from the U.S. rates into SIBOR, HIBOR, which should therefore be beneficial to us from a NIM standpoint through the year.
That takes me to the last thing on -- on loan growth even though -- even this year our non-trade loan growth has been very high. We think we'll end the year at 10 percentage points, 11 percentage points. For next year because of the slight moderation I'm speaking of, I think that loan growth will come off. So we're now targeting 6% to 7% loan growth perhaps in the non-trade segment. There is a little bit of a slowdown on the Singapore mortgage is actually the slowdown being more than expected last quarter. I guided -- I thought they'd probably lose $0.5 billion of loans and point of fact I think we probably lose about a $1.5 billion.
The actual bookings historically when they've typed in booking to reduce about 30% to extend the bookings of about 50%, new bookings and so that's obviously resulting in some slowdown in loan. And then for some reason that I can't fully explain, even though people have taken and booked the loans, the drawdowns are a tad bit slower than they were earlier. So I think the Singapore mortgage would be somewhat slower than we've seen, but even with that we think we should be able to get 4%, 5% growth in the consumer and mortgage books.
So the last variable is the trade finance book and we'd indicated last quarter that we were happy to let the trade finance book and the margin run off because we won't be able to price it up in line with the increase in rates, that still being been the case, so in fact last time we held it flat, this year we let it run off at $3 billion. It's my own view that along -- some along the way is going to start re-pricing, okay, but are not going to continue to do trade finance at such cheap rates.
And so as and when the re-pricing happens and we can go back and start rebuilding the trade book again. So right now our assumption is that we should be able to get roughly mid-single-digit growth in the trade book. Since we balance all of those together 5%, 6% loan growth next year should be possible to achieve.
Finally, down to NIM. I think NIM is actually fairly upbeat and positive a story. The first thing to recognize is that our actual commercial book NIMs have gone up about 17 basis points this year, that's the top red line. And even the red line actually hides the fact that a large part of the NIM increase hasn't flown through. So in our Sing dollar book about 45% of our book price is off SIBOR and so that by and large prices pretty quickly, prices within a month's time lag, you can re-price that.
But the other 45% of our book is of administered rates and fixed rates, a lot of that is in the mortgage book as well and that will be re-priced over the couple of years. So the impact of the rate hike even this year will flow through into next year and to the year after, so there is some tailwind from the rate hikes that have already happened. Then on top of that you factor in the 2 to 4 rate hike that we expect next year, so you will get some lift on the new rate hikes which are still to come through the system.
And then third I think the market and operating environment always take some time to re-price. We've been leading the re-pricing up in several parts of –- in several product lines, but like I said in trade for example we can't push the price up as hard as we want, we lose competitive pressure so -- but over the next couple of quarters I anticipate the pricing continuing to pass on to the customer, some of our competitors spoke of it as well that the pricing to customers is continuing to be hedged up.
So I think you will get some benefit from that as well. There is some pick up in funding costs. By and large our Casa is stable, our market shares are stable. There we don't have to pay up very much, it's been marginal. On the fixed deposit side, rates are going up, but that goes back to what I said. As rates are going up in the fixed deposit side, most banks were more reliant on fixed deposits, they don't have an option but to start pricing it into the customer rate and so we expect that to happen sooner or later. So when you balance all of that together we're actually still quite upbeat about the NIM environment as we go into next year I think should be quite positive.
Our asset quality continues to be stable. We're not seeing any under stress other than a moderate pickup in the SME portfolio which we flagged for several years now that if rates go up, the vulnerable portfolio is likely to be SME where you will see some pain, but in the big scheme of things it's not that material. It's a reasonable size portfolio for us, but it's highly secured, we have very little unsecured SME. And so while there will be some pickup in the SME thing and we can see that, it doesn't worry me over much. So net-net as we put all of that together, that sort of explains the top line. I think growth will moderate a little bit, but overall for our business we're still fairly confident about the prospects for next year.
If there are any questions, over -- I request that you speak into the mics in front of you or we have each will [indiscernible] mics as well. First question please.
[ Ginia Paun ] from Bloomberg. Piyush, could you repeat your numbers on mortgage in Singapore? You mentioned that $1.5 billion more than expected -- I mean, is more than expected, but at $1.5 billion which period? And you say that new mortgage booking off by about 50%, which period are you referring to?
So since the -- well, the first thing we do is we flag that we expected to grow the mortgage book by about $4 billion for the year. Then when they did the tightening last quarter, I said this is slowdown and I expected to come down to about $3.5 billion. What I think we will probably wind up at $2.5 billion instead of $3.5 billion. And the reason for that is that the new loan booking, since they did the tightening measures, it's been down by about 50%. Normally in the past it's been down by about 30%, this time the tightening measures have slowed down the loan booking to about 50%.
Jamie?
Jamie from Business Times. On the savings deposit, I think there was a 3% lift for SGD deposits if I remember correctly from a year ago, did I remember that right? Maybe just a general question on where has the -- sorry, there was a righted market share I think in SGD deposit, I just want to get understanding of where that's coming from? Is it from the ANZ consolidation, are you seeing some organic lift?
We continue to pretty much hold our savings account share in Singapore. It tends to range between 52% and 53%, in the last quarters actually trended towards 53%. So we've been gaining market share by a few decimals of a percentage point and that tends to be organic. In fact if we throw in some of our other we call [indiscernible] accounts north of 54%, but this is organic. The ANZ impact happened a year ago in Singapore.
I'm just wondering because the banks have also talked about whether they can secure more SGD deposits and that's been a bit of concern. So I'm just wondering where do you see that going.
Maybe the real issue in Singapore, if you look at this year, the overall Casa balances in Singapore, savings account balances in the system has shrunk. So we're gaining market share, but in a slightly tighter market I think. So -- and that's happening because a lot of people are moving from savings into some fixed deposits and then some the Singapore bond and the domestic bond and so on. So people are making some shift from the Casa balances into higher FDs and so on. When the shift happens, we don't lose that much money, right, and the market shares still tends to continue to keep up because we are the sticky account. But the bigger competition has been on the fixed deposit side where rates have been going up. We've also tactically be playing in the fixed deposit side. The increase in the fixed deposit rates is what drives the overall blended cost of deposits up for us as well.
Mr. Takashi?
[ Takashi ] from Nikkei. Do you think addings in Hong Kong market will continue to grow next year? And other banks also put their resources into this region. So how do you see the second -- other -- the other aspect also this year will be also compared be softer into this region, so how do you see the competitive environment in Hong Kong market?
Yes, the Hong Kong market is basically the China market and therefore the question is do you expect to see China continue to grow. And we start with the premise that China maybe won't grow at 6.5%, maybe grow at 6%, 6% growth on $11 trillion economy is still a lot of growth and that creates a lot of market opportunities for number of people to play in. That's really what's been propelling large part of Asia's growth. I don't see that changing. There'll be ups and downs and sometimes tighter, sometimes looser, but fundamentally I start with the premise that 6% growth rate on $11 trillion economy, there's a rising consumption, there's an increasing middle class, there continues to be a lot of demand for goods and services. So that has to create a lot of opportunity and Hong Kong tends to be where that opportunity surfaces for players like us.
Goola?
Goola here. A couple of questions. The cost of funds any concern -- the cost of funds rising, would that be of any concern because there's a wholesale market as well because it appears to have gone away from the region because of the higher interest rates and such things. And you mention that a pretty cost on the size -- on the side of the SMEs could be a concern next year. Could you elaborate on that? And also could you break down the type of banking AUM for the total?
So on the first, if there's been a great rise, cost of funds will go up. So the real question to ask is can you pass on the cost of funds to the borrowers or not? That's really the part of the question. And as you can see from our thing, we -- our loan yields went up by 17%, our cost of funds went up by 10%. So our delta between what we pass on to the customers and the cost of funds is 7%. If we compare that with our competitors in the local market, we have the biggest expansion in the difference between our assets yields and our deposit yields. And so just tell you that, yes, we've got to pay some more. We pay less than others because our Casa base is strong, we pay up in fixed deposits, but we're able to price up the loan book, and we're actually disciplined on the loan book, so where we can't price it up like trade, we just let the book run off because it doesn't make sense to do non profitable business from our standpoint. So the short answer is that in fact as rates go up, we expect to continue to be able to re-price the loan book into next year. And some of the -- loan book is contractually, we take the administered loan on the -- 50% of our mortgage book is [indiscernible] at a charge, right, it's the administrative loan rate. We raised it 3x this year by about 40-odd basis points on an average. SIBOR went up by about that much, so we pretty much raised it by the extent of SIBOR this year, but with a lag. So it keeps lagging -- we raised this thing by 3 months or 6 months behind SIBOR and therefore the full impact of that hasn't flown through, so it will flow through next year. So short answer not that concerned yet about increase in the cost of funds. Your second question was SME, I think slightly more longer. If you think about the biggest areas people who suffer with higher rates are unsecured consumer books and SME books. The unsecured consumer book in general is not huge for us in the big scheme of things, so delinquencies tend to go up. Now in that book we're further advantaged because the borrowing caps in Singapore which are regulated for 4x income means that nobody is overly extended in the unsecured consumer space. So that part of the book -- because the small size of the book and the fact that's heavily Singapore and the regulations in Singapore are supportive doesn't worry me. Then the other place where you expect delinquencies to go up in base side is SME. Again our SME book is highly secured, but that's notwithstanding. You should expect delinquencies to creep up and you should expect NPAs and provisions in that book to go up. And we've already seen the first signs of that as rates are going up. But again, in all our stress testing and other thing, it's not very material, so when we see that our provisions for next year will be in the 25 basis points, 27 basis point range that's already factored into it the fact that we think SME loans will go up. Your third question was around the AUM. For total $220 billion in AUM I think $151 billion relate to the high net worth private banking [indiscernible].
[ John ], you had question?
[ John Ketting ] from Reuters. You spoke a little bit about the trade war in the context of the macroeconomic environment. Just wondering if you could elaborate a little if you're seeing any signs of the trade war impacting your business, in what segments that would be in or if you anticipate in the coming months for there to be more impact on certain segments in the business?
Well, as I indicated, the biggest impact on our business is from market sentiment, so the equity market is being closed, right, and so you can't get any ECM deal done in the last few months, investors are not willing to put money to work. Similarly the bond market, if you look at the total issuances done in both ECM and DCM, they just completely fall off a cliff, and that shows up in our investment banking fee income, right, and so that's an obvious one. On wealth management, our total fee income has been flattish in the last quarter and given that it normally grows, that reflects the fact that the anxiety means that some of our customers don't put so much money to work and so they trade little restricted. So that's what I mean, market sentiment and anxiety causes some slowdown in some activities that you normally expect to continue growing and through that anxiety there, I don't see the people coming back to this market in a hurry. The flip to that is I think there's a massive deep buy plan, so on the bond side, there's hundreds of billions of bonds that need to be refinanced over the next 18 months. Similarly on the ECM side, there are lot of equity deals which are just being pushed back, but they're still waiting to come to market, so it's going to be interesting. I think if there is some degree of -- for example if they actually do have some conversation of fee-offered trade deal, I think you'll see a massive resurgence in business volume because people are waiting for some degree of certainty before they come back to the market.
[ Cheng Gin ]?
[ Cheng Gin ] from [ Saupol ]. I have one question about digital bank because both UOB and OCBC recently announced that they are going to put in more effort in building up their digital banking business. So do you expect that your digital bank business will face more intensive competition both in local market and overseas? And in this case how will DBS maintain your competitive strength?
So first of all, see, large part of what we're doing is the digital transformation, right, and frankly if you read what OCBC said, they said they don't believe in digital banking, they believe in digital transformation. And to a large extent, this is what we do as well, the core of what do digital transformation because if we can do that and focus on better customer journeys if you can improve your [indiscernible] and reduce cost. We're actually quite confident that the digital transformation is an absolute agenda. As long as you can keep doing that you will get greater business and you will be able to improve your cost income ratio, so that we're continuing a pace. In some ways the digital transformation requires many years of work. So I sometimes say between 2009 and '14 we made a down payment of 5 years where we upped the investment spend from $700 million to $1 billion a year to get the foundation. And then the last 4 years we've invested even more to build the sole capability of building a new technology stack, smaller data centers, more virtualization, more API driven. It's not that easy for people to catch up on that investment in technology and the change in the cultural mindset very easily, so I'm sure people can do it, but it's not overnight. The other piece, we also believe that there is an opportunity to be able to engage with the customer on a mobile phone, which is what you call digital banking. And we think that that's a really differentiated way to distribute in big countries and so to that extent I guess we differ from some of our competitors because we think this is viable, and people like Alibaba have proven that it can be done. So that of course has driven since we right now in India and Indonesia continues to grow extremely well. In terms of -- I'm quite convinced that the distribution case has been proven, you can distribute at much lower cost than through a brick and mortar infrastructure. I think one of -- the things that is still open in India is can you make that customer-base profitable. In Indonesia because we pivoted and we have a different strategy, their customer base is profitable, so we now know even how to make the customer-base profitable. And so we're still quite bullish. We think taking the digital agenda and driving it to improve the quality for distribution is a smart thing to do.
[ Brendan ]?
Got a question about NIM. So the projection for Q4 is 1.86% to 1.87%, but beyond that it's the -- U.S. Fed that's hiked more than -- that's hiked 4 times, where do you expect this figure to be?
I think you've got to work out the math yourself, so I don't want to be cornered into giving you a number which you then -- but I think that -- as I said before the drivers on NIM are quite simple, right, it's how many fed hikes do you see and then what is the flow through from there into the Singapore or Hong Kong rate. The flow-through, the pass-through can be as low as 30%, it can be as high as 90%, 100%, right? And that really depends on if the local currency is weakening or strengthening, so if the U.S. dollar strengthen, the pass-through is very high. If you look at the pass-through this year, it's average about 65%. If you look at the pass-through in the last 3, 4 months, it's been 100%, right? We've been getting almost 100% pass-through into SIBOR and so on. So because our general base cases are U.S. dollar will stay strong through next year, we think pass-throughs will be relatively high as you go into next year. On top of that then you have the impact of this year's rate increase. As we've said a large part of that has not flown through our book yet in the Sing dollar book and on the bulk of the book between [ FHR ], fixed deposit, for fixed rate related, much of that will flow through in the next year, so.
[ Canho ]?
[Indiscernible] from Nikkei. Question about trade war, do you think there will be an impact on your loan growth next year?
Well, we've already guided for moderation in our loan growth and I -- frankly my plans are still quite robust, right, as we go into the thing, but I'm a little uncertain because of the macroeconomic uncertainty. Again, people will put capital to work, whether they invest and so on, and therefore this year we're growing at 10%, 11% the non-trade loan book, next year, we're assuming we will grow 6%, 7%, much lower. And that's not based on any insight, it's just based on assumption that given the uncertainty, trade war et cetera the amount of investment might slow down.
[ Juning ]?
Just a question. There's -- I'm going to talk about financial inclusion and how we can use digital bank to tap the un-banked or the under-banked. How far do you think DBS can go with that, especially with your digital banking strategy in India and Indonesia?
So I think we can go a long way, but it also depends on your business strategy, right? So it's a part of your strategic agenda or not. In Singapore for example it is part of our business strategy and the fact that we can now use the mobile and digital to get to domestic workers, get to the foreign workers, get to migrant workers at lower cost and give everybody an ability to use their buddy to transfer and so it's part of our strategy, so -- and it gives us lot of access. In other markets like India and Indonesia it's not part of our strategy, right, and so we're a small bank in the big scheme and for us to go into the billions of under-banked in India is not necessarily the smartest thing to do. State Bank of India opened 300 million accounts and no matter what we do, that's not the game that we can play in. Also because in country like this we're basically targeting based for smartphone and in India English language. That limits your target market with people who own a smartphone and people who speak English.
Is there a final question? If not, thank you everyone for coming.
All right, thank you. Thank you very much.