DBS Group Holdings Ltd
SGX:D05
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DBS Group Holdings Ltd
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Good morning, everyone, and welcome to DBS' Fourth Quarter and Full Year Results Briefing.
This morning, we announced a full year net profit of $5.63 billion, yet another record high. Notably, return on equity at 12.1% is our highest in more than a decade. Fourth quarter net profit increased 8% to $1.32 billion.
So to tell us more today, we have our CEO, Piyush; and CFO, Sok Hui. Sok Hui, please.
Good morning, everyone. We are still within 15 days of our Chinese New Year celebration, so let me wish everyone a very happy and prosperous lunar new year.
We achieved another record performance in 2018. Net profit crossed the $5 billion mark for the first time, rising 28% to $5.63 billion. Total income increased 11% to $13.2 billion from loan and fee income growth as well as the higher net interest margin. The results were moderated by weaker performance in Treasury Markets.
The reported cost-to-income ratio was affected by the consolidation of ANZ and weakness in treasury income markets. Excluding these items, the underlying cost-to-income ratio was stable.
Total allowances halved as specific allowances fell to 19 basis points of loans. Return on equity rose 2.4 percentage points to 12.1%, near the record high more than a decade ago in 2007, but interest rates were twice as high and capital requirements less stringent.
For the fourth quarter, net profit rose 8% from a year ago to $1.32 billion. Total income grew 6% to $3.25 billion, underpinned by healthy business momentum. Loan growth and net interest margin progression was sustained over the quarter. The combined income of Institutional Banking, Consumer Banking and Wealth Management rose 16% to $2.95 billion. Market uncertainty resulted in the halving of Treasury Markets income to $92 million, the lowest on record.
The balance sheet remained healthy. Nonperforming asset formation fell 4% from the previous quarter, and the NPL rate improved 0.1 percentage point to 1.5%. Regulatory capital and liquidity ratios were all comfortably above regulatory requirements. The board proposed a final dividend of $0.60 per share, bringing the full year payout to $1.20 per share.
Full year total income grew 11% to a new high of $13.2 billion. Net interest income rose 15% to $8.96 billion. Net interest margin rose 10 basis points to 1.85%, in line with higher interest rates. Loans expanded 6% in constant currency terms from consumer and nontrade corporate loan growth.
Fee income rose 6% to $2.78 billion. Increases in wealth management, card and transaction banking fees were partially offset by lower investment banking fees. Other noninterest income fell 4% to $1.45 billion. Lower gains on investment securities were partially offset by property disposal gains.
Expenses rose 13% to $5.80 billion. If ANZ were excluded, expenses increased 7%. The underlying cost-to-income ratio was stable. Total allowances fell $834 million to $710 million. Allowances have been high in the previous year due to charges for oil and gas support service exposures.
Compared to a year ago, fourth quarter net profit increased 8% to $1.32 billion. Total income rose 6% to $3.25 billion as an increase in net interest income was moderated by weakness in noninterest income.
Net interest income grew 11% to $2.33 billion. Net interest margin increased 9 basis points to 1.87%, in line with higher interest rates. Loans were 6% higher in constant currency terms.
Fee income was stable at $635 million as increases in card, transaction service and loan-related fees were offset by declines in Wealth Management, investment banking and brokerage fees.
Other noninterest income fell 13% to $280 million from lower gains on investment securities. Expenses rose 11% to $1.50 billion. The underlying cost-to-income ratio was stable. Total allowances fell 9% to $205 million due to a higher write-back of general allowances.
Compared to the previous quarter, fourth quarter net profit was 7% lower, mainly due to headwinds in Treasury Markets and Wealth Management. Business momentum was otherwise healthy.
Total income fell 4% as weak financial markets resulted in lower noninterest income. Net interest income rose 3%. Loans grew 2% from growth in nontrade corporate loans. Net interest margin increased 1 percentage point to 1.87%.
Fee income fell 9% as declines in Wealth Management and loan-related fees were partially offset by increases in card and transaction service fees. Other noninterest income was 31% lower due to weaker trading income. Expenses rose 1%. Total allowances was 13% lower.
Fourth quarter net interest income rose 3% from the previous quarter and 11% from a year ago to $2.33 billion. Net interest margin increased 1 percentage point during the quarter to 1.87%. Excluding Treasury Market activities, net interest margin rose 2 percent -- 2 basis points due to higher interest rates in Singapore.
The underlying NIM increased 16 basis points over the past 4 quarters to 2.10% as high interest rates resulted in a faster increase in loan yields and deposit costs in Singapore and Hong Kong. The drag from Treasury Markets was due to swap accounting, lower gap in income and NIM compression in the fixed-rate securities portfolio as funding costs rose. For the full year, net interest margin increased 10 basis points to 1.85%. Excluding Treasury Market activities, NIM rose 14 basis points.
Overall loan growth was up $21 billion or 6% on year and up $5 billion or 2% from quarter. The growth was due to nontrade corporate loans across various sectors. Nontrade corporate loans increased 12% or $20 billion over the year with a growth occurring steadily over the 4 quarters.
Consumer loans were little changed during the quarter as a $500 million increase in housing loans was offset by similar decline in margin financing due to weak financial markets. Consumer loans rose 3% or $4 billion over the year, with Singapore housing loans accounting for half of the increase.
Trade loans were also stable during the quarter. They declined 6% or $3 billion over the year as we decided to let maturing exposures run off due to unattractive pricing. Similar to 2018, we expect overall loan growth in 2019 to be in the mid-single digits with growth led by nontrade corporate loans.
Deposits rose 2% or $6 billion in constant currency terms during the quarter. For the year, deposits rose 5% or $19 billion. The increase over both periods was in line with loan growth. Most of the increase was in fixed deposits, in line with industry trends.
Our share of Sing dollar savings accounts was maintained at 52%. Other funding rose $5 billion during the year from issuances of sub-debt and medium-term notes. Our liquidity ratios remained well above regulatory requirements. The liquidity coverage ratio was at 138%, while the net stable funding ratio was at 109%.
Fourth quarter gross fee income rose 3% from a year ago to $756 million. Card fees increased 34% to $202 million from the consolidation of the retail and Wealth Management business of ANZ. Loan-related fees rose 17% to $90 million with a higher number of deals. Transaction service fees grew 10% to $169 million as cash management increased 15% and trade rose 3%. These increases were moderated by a 4% decline in Wealth Management fees to $218 million.
Fees from investment product sales fell with more volatile financial markets with the impact moderated by 1/3 increase in insurance fees. Financial market volatility also resulted in a halving of investment banking fees to $29 million. Compared to the previous quarter, gross fee income was 8% lower. Declines in Wealth Management and loan-related fees were moderated by an increase in card and transaction service fees. For the full year, gross fee income grew 8% to $3.25 billion, led by card, Wealth Management and transaction banking fees.
Consumer Banking and Wealth Management full year total income increased 21% to $5.65 billion. Loan and deposit income rose 26% to $3.32 billion from volume growth and a higher net interest margin. Investment products grew 12% to $1.52 billion due largely to higher insurance income. Card income rose 25% to $773 million from higher credit card transactions as well as the consolidation of ANZ.
Wealth Management customer segment income grew 26% to $2.66 billion as assets under management rose 7% to $220 billion. Income from the retail customer segment increased 17% to $2.99 billion. Expenses increased 18%, less quickly than income, to $3.03 billion. The cost-to-income ratio improved 1 percentage point to 54%. Profit before allowances increased 24% to $2.62 billion. We had a market share of 31% for Singapore housing loans and 52% for Singapore savings accounts.
Institutional Banking's full year total income rose 9% to $5.76 billion. The growth was led by cash management, which increased 55% to $1.71 billion due mainly to a higher net interest margin as well as volume increases. Cash management deposits rose by an underlying 3% after adjusting for currency effects. Treasury customer income increased 5% to $602 million. The growth in cash and treasury income more than offset the declines in loan fee and investment banking income.
Expenses grew 5% to $1.84 billion. Like Consumer Banking and Wealth Management, the increase in costs for Institutional Banking was less than income and the cost-to-income ratio fell 1 percentage point to 32%. Profit before allowances was 11% higher at $3.92 billion.
Business momentum in Consumer Banking/Wealth Management and Institutional Banking, which have propelled the group's growth in the first 9 months, was sustained in the fourth quarter. The year-on-year income growth for both businesses was $417 million in the fourth quarter or a 16% increase from a year-ago period. The increase was materially higher than the $239 million or 10% increase in the first quarter despite headwinds in the fourth quarter, which affected Wealth Management and investment banking income during the last 3 months.
Treasury Markets income is shown by the red bar segment. The fourth quarter income of $92 million fell 3/5 from the previous quarter and slightly more than 1/2 from a year ago. It was the lowest on record. The weak performance was due to difficult market conditions during the quarter.
Treasury customer income, shown by the beige bars and is recorded under Consumer Banking/Wealth Management and Institutional Banking, also fell, declining 15% from the previous quarter and 8% a year ago to $257 million, the lowest in 2 years. For the full year, Treasury Markets income fell 21% to $672 million. Treasury customer income was 4% higher at $1.20 billion. Total treasury income fell 7% to $1.87 billion.
For the full year, expenses rose 13%, and the reported cost-to-income ratio was 1 percentage point higher at 44%. For the fourth quarter, the reported cost/income ratio was 46%. The reported cost/income -- the reported cost and the cost/income ratio for the year were affected by 2 principal factors: firstly, Treasury Markets income was exceptionally weak, declining 21% for the full year and more than 1/2 for the fourth quarter compared to a year ago; second, ANZ, which had the first full year of consolidation, had a cost/income ratio of 52%.
On this chart, you will see the income expenses and cost/income ratio when ANZ and Treasury Markets activities are excluded. These figures are in red. On this underlying basis, income and expenses both grew 8% for the full year and the cost/income ratio was stable. For the fourth quarter, which is not shown on this chart, there was a 1 percentage point drop between the 7% income growth and 6% expense growth compared to a year ago. The underlying cost-to-income ratio was stable.
Hong Kong. Hong Kong had a record performance in 2018. Net profit rose to 40% in constant currency terms to $1.36 billion as total income increased 26% to $2.74 billion. If a property disposal gain of $86 million was excluded, total income and net profit were also at records.
Net interest income rose 30% to $1.83 billion. Loans grew 11% from trade and nontrade corporate loans. Deposits rose 9%, led by fixed deposits, in line with industry trends. As the current and savings accounts now made up 57% of deposits, the increase in HIBOR and LIBOR during the year resulted in a 27 basis point increase in net interest margin to 2.01% for Hong Kong.
Fee income increased 7% to 7 -- to $617 million, led by Wealth Management and cash management. Other noninterest income grew 56% to $294 million from the property disposal gain and higher treasury customer sales. Expenses rose 14% to $1.06 billion due to higher business volumes and franchise investments. The cost-to-income ratio improved from 42% a year ago to 39%. Total allowances were 8% lower at $72 million.
Nonperforming assets fell 4% from the previous quarter to $5.68 billion. New NPA formation for IBG of $280 million was within the range of recent quarters. The NPL rate improved from 1.6% in the previous quarter to 1.5%.
Specific allowances of $229 million were a little changed from the previous quarter and a year ago, at 25 basis points of loans in line with the level we expect in the coming year.
General allowances or expected credit loss for stage 1 and 2 assets fell during the quarter to $2.57 billion. The net write-back of $24 million reflects mainly the reversal of stage 1 and 2 expected credit loss into specific provisions as performing assets become nonperforming. The MAS 1% requirement for general allowances rose $42 million from the previous quarter to $2.95 billion due to loan growth. The shortfall between the 1% requirement and expected credit loss for stage 1 and stage 2 resulted in a regulatory loss allowance reserve of $376 million, an increase of $65 million from the previous quarter. The amount was transferred from retained earnings.
The Common Equity Tier 1 ratio rose 0.6 percentage points from the previous quarter to 13.9% due to retained earnings during the quarter. The leverage ratio was unchanged from the previous quarter at 7.1%.
The board proposed a final dividend of $0.60 per share for the approval at the coming AGM. This will bring the full year dividend to $1.20 per share. Based on last closing share price, the dividend yield is 4.8%.
To summarize, we achieved another record performance in 2018. The real significance of the results was the 2 percentage point increase in ROE to 12.1%, near the record in 2007 when interest rates were higher and capital requirements less stringent than today.
Adjusting for interest rates and capital, we estimate the ROE today is 4 percentage points better than in 2007. The results were achieved despite strong headwinds in financial markets in the second half, which affected Wealth Management, investment banking and brokerage fees as well as Treasury Markets income.
The stronger profitability reflects the structural improvements we have made during the past decade to our franchise. They include a greater contribution of higher-returns businesses such as Wealth Management and cash management to the group, deeper customer relations collaborated by market share gains in Singapore, more nimble execution as well as improvements in the business in Hong Kong and the rest of Greater China.
Despite a challenging fourth quarter, business momentum was maintained as the year-on-year income growth for Consumer Banking and Wealth Management and Institutional Banking remained strong. The results demonstrate the ability and resilience of our franchise to capitalize on the region's long-term prospects and navigate any short-term uncertainties.
Thank you for your attention. I'll now hand you over to Piyush.
Thanks, Sok Hui. Again, let me also echo Sok Hui's welcome and wish you all a very prosperous and happy year of the pig.
I'm basically going to maybe spend a few minutes talking about the quarter and then our thinking around where the world is and what we're seeing and expecting to see in the next coming months.
Sok Hui pointed out the highlights, 11% top line growth for the year. Some of that is ANZ and net interest income. But ex the ANZ, we still had north of 7% top line growth, and I think that this reflects the underlying momentum in the business.
As she pointed out, fourth quarter was challenging. And you've seen around the world -- actually, it's quite ironic, when I did the last quarterly review, which was I guess, end of October, early November, the world was looking relatively upbeat. People were still pricing in 2 to 4 interest rate hikes. And then everything turned around perhaps more quickly than you would normally expect.
And so in the residual part of the year, yield curves came off, yields came off. Every asset class basically got hammered, currency got hammered, rates got hammered, credit got hammered, equity got hammered. Everything just came off massively. And you can see that in the impact across all of the global houses. So we weren't spared either.
Our overall treasury income for the fourth quarter, if you take both trading and the customer activity, is down about 27% for the quarter, and that's in line. I saw the reported results on the big American firms, and those range between 25% and 30%. I think JP was 30%, Morgan Stanley was around that. The European banks actually saw even sharper falloffs in their FICC performance for the quarter.
When the markets are so turbulent, it's not just FICC that suffers, obviously, capital markets stay sharp. So the deal flow in both, the debt capital markets and ECM was extremely variable and didn't came through. And as you've seen before, Wealth Management suffered because a large part of Asia, the wealth people are trading people and, therefore, the actual investments in equities, and equity being funds, also came up quite sharply.
So net-net, it was a perfect storm from a macro-environment standpoint. And to be able to get 6% top line growth in the quarter despite all of those headwinds is something that we are actually quite pleased about, as Sok Hui pointed out. It just speaks to the underlying momentum in the rest of the businesses and the rest of the commercial book, which continues to be quite solid.
We had 28% profit growth last year, which is good. And Sok Hui's already reflected on the fact that the 12.1% ROE is really strong given where we are in capital adequacy and where our interest rates are compared to where they used to be.
She did mention this, and I thought it would be useful to point this out, more than just the year's performance and the quarter's performance, I think it's worth reflecting on the structural change in the DBS franchise over the last decade or so. So compare us to 2009. If you look at wealth Management, our business has grown 5x in this period of time. It used to be 8% of the bank, it's now 20% of the bank.
And if you look at cash management, cash in custody, it used to be 3% of the bank; it's 13% of the bank. That's up 8x. Now some of that is interest rates. But if you exclude interest rates, 3/4 of the gain is actually underlying business volume, fees and flow.
So 1/3 of the bank's income today comes from Wealth Management and cash management, which are structurally very high ROE businesses. They are not just consumer businesses. And the reason we pointed out because that 33%, it is 1/3 of the bank today, which is quite material.
The other thing we'd probably point out is the bottom part. If you look at our overall performance from the North Asian franchise, Hong Kong, China, Taiwan and so on, that's also done very well. It's -- in the same period of time, Hong Kong itself is up 3x, so well over the group of which is 2x. And the rest of China, Taiwan, et cetera, is actually up 4x in that period of time. So again speaks to strong performance. Again, this quarter was a good performance for all of these categories. Wealth Management was up 26%, cash management was up 15%, Hong Kong was up 37%, the rest of Greater China was up nicely.
So the point I wanted to leave you with is there's a structural shift in the nature of a franchise, which comes through, and that gives us a degree of resiliency even in the face of turbulent financial markets.
So where do we see the world going? First, it's quite clear, there is a quite synchronized global growth, I think -- slow down. I think the U.S. is still quite robust but slowing down. I think you'll be -- you'll get about 2.5% growth rate from the [ 3 ]. U.S. is quite clearly slowing down. The latest forecast are for 1.3-ish down from 1.8%, 1.9%. And you can see the impact of a slightly slower China. I think China will still come in at 6.2-ish. But the impact was a slightly slower China; on the rest of Asia, PMIs are under 50%; and G8 is actually slowing down a little bit. So you do see synchronized slowdown.
I think the geopolitical issues, everybody knows, I think there is still continuity of volatility this year, either, the U.S.-China stuff, the Brexit stuff, domestic U.S. politics, there's some elections in the region. So I anticipate you will still choppy markets and a general macroeconomic slowdown.
At the same time, I called in mitigating factors. One, I've made this point before, notwithstanding whether they come to an agreement on trade in the next few weeks or not, it's quite clear that the shift -- structural shift of trade away from China is a very slow process, a [ glitch ]. We're talking to a lot of clients, and I think it continues to be the case that people are not really moving capacity out of China yet. What people are doing is if they already have capacity outside, they're ramping it up. And the incremental new capacity, the need, they're pretty much looking for alternatives to China. But the actual shift of capacity from China is not happening very rapidly, so I think that will be somewhat slow.
The other thing interesting is people who are shifting capacity or who are looking at adding capacity outside of China are still looking pretty much at the region. So Thailand is being talked about a lot. Vietnam is being talked about a lot. Interestingly, India, many of our clients and not just [ OpsCom ], many of our other clients are now speaking about putting capacity or building up incremental capacity in India as well. Now all of these are actually good for us. They play to our strengths because we have the ability to participate in all of this new capacity formation if it happens.
I will say the domestic consumption is likely to hold up. It's in a [ slow ] dive a little bit, but it's still high single digits, and you can see that across the region. So we're not seeing that decline massively.
What's obviously happening is Central Banks are rethinking monetary policy. RBI, cut rates already. RBA has already indicated the next great movement will be downward. And in general, there is some monetary policy relaxation around the region, which means that, that should create some stimulus for growth.
And finally, I do think you'll see fiscal stimulus all around. If there is a slowdown and if there's some headwinds, you will see that the Chinese have already started doing it. They're doing a substantial amount of investment. Closer to home, the Singapore government has got some massive infrastructure projects, including Changi Terminal 5, et cetera, on the [ anvil ], so that look -- causes a large amount of fiscal stimulus. But I think you'll see that in other countries as well. Election coming up in India, election coming up in Indonesia, election coming up in Thailand, so most election years, you tend to see some fiscal stimulus.
If we put all of that together, actually, we think that the conditions for economic growth was -- they will be a little bit slower, they are not going to be a major worry. And that's what guides our outlook at this point in time. We guided for mid-single-digit loan growth. We're keeping the guidance. If you look at our loan growth in the fourth quarter, notwithstanding all of the concerns, we still got 2% constant-currency loan growth in the quarter.
The loan growth is quite broad. Obviously, Singapore housing is slow. But outside in the corporate side, we're seeing loan growth from property activity, particularly in the U.K., Australia, outside of our region, our clients. We continue to see loan growth from Chinese businesses coming out of China, selectively but it's there.
We continue to see loan growth from deals. You take, for example, the CapitaLand deal just now -- and the [ Capital ] deal just now, the mega-price deals which are happening, which are creating momentum around that. The TMT sector in particular is actually quite active. We're continuing to see that. There is loan growth in the energy sector's renewables. That's quite broad-based, so multiple sectors across the region, we've seen that loan growth. And it started in the fourth quarter, pipelines are strong, and we continue to see the momentum as we go into this year. So plus/minus of 5%, 6% loan growth, like last year, for the time being, looks achievable.
Similarly, NIM. If you look at NIM, we got 10 basis points last year. That's obviously helped by rate hikes. But as I pointed out, a large part of our loan book reprices slowly. Last year, we repriced -- in the mortgage book, we repriced the FHR part of the book priced last year, we've already repriced it one more time in January, just a couple of weeks ago. But it's still lagging SIBOR. So we do think we have the opportunity to continue to reprice that up.
Our own sense is that we'll see normal rate hike this year. We will still see 4 to 5 basis points of NIM progression increase in the year. And if you get a rate hike, which is not impossible, then that might be closer to 5 to 6 basis points pickup in NIM in the course of the year average.
Our income growth, therefore, we think we will continue to see a high single-digit income growth. The -- both non -- noninterest income, both on fee and commission. It assumes that there'll be a small degree of normalization in the market business. As Sok Hui said, the market business is historic lows. It's really now down to about 2% or 5% of the bank rate. And so it assumes a little bit of a correction, not a huge correction.
Cost-income ratio at 43%, that was a guidance for last year. We missed it, and we missed it principally because [ P&M ] was so slow in the fourth quarter, and that obviously -- the income side impacts the ratio.
We'd earlier said that we hope to be able to hold it flat to 43% this year. We continue to see productivity gains in our business that is continuing to give us 0.5 percentage point improvement. We've tracked that again. But this year, we are making investments in India for the [ subsidization ], so that will eat this up. So 43% we think we should get.
Specific allowances. The overall portfolio is good. The NPLs, as you know, as the ratio came down to 1.5%, but we're not seeing any challenges anywhere in the portfolio. And so we think pretty much at cycle average, we should be able to maintain allowances through the year. And if you put all of that together, you continue to see ROE improvement. I had earlier said that we hope we will be -- start approaching 13%. That was approaching 13% was -- assuming you'd get a couple of rate hikes. If you don't get a couple of rate hikes, you'll still see ROE improvement this year, not as strong as I had originally anticipated because, right now, I think the 2 to 4 rate hikes is probably unlikely to happen.
But when you put all of that together and you juxtapose it with my earlier slide, I feel good about the overall shape of the business. The balance sheet is strong. Liquidity is good. We're not seeing issues in terms of credit. We think we can get reasonable growth rates. It won't be double-digit or high single-digit top line growth rates. We continue to drive efficiency. And therefore, we hope to be able to continue to see improvement in ROE through the course of this year.
I'll stop there and happy to take questions.
When you ask the questions, I request if you could speak to the mics because we have a webcast going on, and it just picks up the sound better. Can we take the first question, please? Chanya?
I have 2 questions. The first one is about Wealth Management. You mentioned that Asian trading is very transaction-based. Do you see a shift in change in for this model because many wealth managers in Asia, is that changing? And the second one is about China. We have seen lots of default -- I mean, a significant number of more defaults last year. How would that -- what would that mean to you, China and Hong Kong business?
On the first, the model is changing, Chanya, but it's changing very slowly. I first started pushing this agenda of discussing portfolio management and annuity fee-based about 10 years ago, even before I joined DBS, in my previous job. And I'll tell you, if you look at the percentage shift in the annuity or the fee-based DPM activity across the region from then to now in the decade, it's still in single-digit percentage points, that's a slow shift. We are seeing the shift happen and we are driving the shift ourselves. We're building up the DPM business. But I don't think it's going to become like -- anything like the European business anytime soon. I think it will take several years before it gets to a meaningful part of the business. It's like still low double digits 10%, 12% of our business comes from that model.
On your second question on bond defaults, there were almost 100 bond defaults in China last year, 98 or 99 I counted last. And I think that will continue. So it's -- I think the Chinese are sort of running a schizophrenic policy in some ways. On the one hand, the easing monetary policy, reducing reserve requirements and pumping liquidity in the system for the broad-based system. But in testing, and I think honestly, smartly, they continue to keep liquidity away from certain kinds of companies. They're keeping liquidity away from the overcapacity sector. They're keeping liquidity away from property, et cetera. So you're finding that in some of the sectors, the POEs, power enterprises, are not being allowed to do bond issuances, so they're finding the financing difficult. In some cases, even if they wanted to, it's just the market is not there for them, but it has improved.
If you compare the last 4 months, 4 months ago, the high-yield property, the yields had gone through the roof, so credit spreads have corrected somewhat. But I still think that you will find an idiosyncratic default in China in the right sectors. Fortunately, for us, we don't have exposure in any of these bond defaults. Say we had a couple of -- I'll call them near-misses because of the exposure in the group, where some companies defaulted, not our client. And I think that will continue to be the case. We've reviewed our portfolio intensively 2x or 3x this year, and we don't anticipate any of our portfolio companies really falling foul of this loan process.
[ Stephanie ]?
I've got 2 questions here. So why the costs associated with the ANZ takeover account for so much of a cost increase? And is this the start of slowing profit growth and what's the management doing to cope with this?
Actually, I'm not sure I understood the question. But maybe let me tell you this, and let's see if it answers that. The businesses we acquired from ANZ are higher cost--income ratio businesses. In fact, when ANZ was running the businesses, they were running a cost-income ratio of over 90%. They had large footprint. They had to employ a lot of people, they're very consumer heavy, large technology. In acquiring the businesses, we've actually been able to take out a lot of the cost, and therefore, we've actually been able to shrink the cost-income ratio now down to the low 50s. But that is still higher than our own cost-income ratio. And therefore, it actually -- on a weighted average basis, it increases our cost-income ratio. Even though it is very profitable. We made $160 million, $170 million from the transaction last year, which is well more than we paid for it. So it's very profitable. It is very good for the shareholder. But just from the metric of cost-income ratio, because the efficiency of the business is higher than our efficiency, it tends to add to our cost-income ratio. Does that answer your question?
Any further questions? Goola?
I have a couple of questions. The first one is how would you think about a slower economic growth around the region and your possible buildup in CET 1, and dividends?
Oh, CET, yes.
Yes, CET1 and dividends. That's the first question. And because your payout ratio now is around 55%, but obviously, as your earnings go up, you'd pay more dividend. And the other question is, could you give us an update on Digibank, on your digital initiative? And your Indian plan, how much capital this will take up and what you're expecting and so on and so forth.
Okay, so on the first question on capital and dividends, as you know, we just doubled our dividend ratio this last year, went around $0.66 to $1.20. And as you correctly pointed out, even though we don't focus on payout ratio, it is 55%. So it's a high payout ratio and a dividend yield of 4.8%. So at this point in time, we're still pulling this together and digesting it and figuring what we want to do in the future. We really haven't given it too much thought. I mean, quite clearly, if on a sustained basis, we think growth opportunities in the region are limited, then we will go back, and we will set both capital and dividend. However, we do think that's not the case. I think even a slow Asia grows at 5.5%, 6%.
And I do think there are good growth opportunities. And certainly, in all the countries that we are trying to grow, we just pointed out an audacious strategy has been paying off. If we can make our India, Indonesia strategies pay off, then we think there's enough opportunities for growth in the region. Nevertheless, we will keep an eye on the total capital, CET1, dividend, et cetera, over the coming quarters. On the Digibank, we are actually quite pleased. Things are going well. First of all, on our core businesses, remember we have talked about our digitalization of the bank, but -- and we said that in the SME and consumer franchise and the whole bank, that's driving efficiency, that continues to do so. We are seeing actually a 1 percentage point productivity gain and continue to see -- we continue to see that in 2018. That's what drives the 0.5 percentage point productivity gain in the total because, as you know, 1 percentage point gain in half of our income -- half of our business. So that continues. We are quite pleased.
In India, the Digibank, we pivoted our strategy about 2 or 3 quarters ago, pivoted to the extent that earlier we were heavily focused on customer acquisition. We're now 2.3 million customers. But what we learned from Indonesia, where we're now with 400,000 customers, is that actually focusing on slightly fewer customers but greater customer profile is probably a smarter way to build out that franchise. The Indonesian franchise is actually more profitable on a customer basis than the Indonesia -- than the Indian franchise. So early last year, we pivoted our strategy in India also to target customers a little more carefully than we have been doing before. And that's beginning to pay off. So our customer profile in the second half of last year, even in India, was much better than it was before, so we are actually quite encouraged. In both countries, in relation to the liability offering, we now have this incremental range of products and particularly lending. So we've been able to start growing the lending book in both countries quite nicely. And as I said before, if you can start growing the asset side of the balance sheet along with the liability side, then you start getting profitability in the business much faster. So again, that's beginning to happen, so we're quite pleased with that as well.
I'm sorry...
So on the thing -- one of the other things that we've -- again, pointed out before, we figured that the model we have in Indonesia, what I call the phygital model, so it's digital but we have some physical -- we have 40-odd branches. We have points of presence, we have some [ parts ] from ANZ. We're finding that that's helpful. So we're going to try and replicate some pieces of that in India this year. We're going to actually launch our subsidiary on the 1st of March. And between the 1st of March and the end of the year, we will start rolling out some more branches. We'll open a couple more branches in Bombay, in Delhi, seek for more cities, we'll open up a kiosk, more points of presence, targeted at building out the SME portfolio and then buttressing the growth in the consumer business as well. Interestingly, it doesn't require any more capital. Right now, the capital that we have in the branch we can flip over into the subsidiaries, so we don't need to put any more capital right now. But if our ambitions are realized and we start getting the growth rates, particularly in the asset side that we want, then of course, we'll have to continue to support it with capital for a little bit longer until it starts paying for itself.
[indiscernible]
[indiscernible] Two questions and one is on the follow-up of the Digibank because UOB recently announced that they are going to launch a pure digibank in 5 of their markets and some of them are [ opening that thing ] with [ GPN ], for example, Indonesia, so how do you think that it will affect your Digibank business? And do you also plan to launch this Digibank business in other Asian markets as well? And my second question is on mortgage loans. So given the slower economic growth outlook as well as with the cooling measures still in place, how -- what's your estimation of your mortgage loan growth this year?
So the first, there are a lot of other digibanks. UOB is not the only people launching digibank. Jenius launched digibank in Indonesia even before we did. Kotak has a digibank in India, 811. And so there'll be a few other digital-only offerings. We think that our digital offerings and digital capability are actually very good. And you've really got to work on both the customer journey, you've got to work on the product suite, you've got to work on a whole breadth of offerings. And we've got -- we've now got almost 3 years into the journey in India and almost 2 years in Indonesia, so we've learned a lot in those 2, 3 years. So it takes time to learn and build momentum. We have momentum at this stage, so we're really not overly concerned about the momentum slowing down with the launch of incremental digibank offerings. Frankly, with commercial banks, they are all improving their digital capabilities. So it's not just new players, everybody's improving their digital capabilities as well.
The good news is these are large growing markets. And in a large growing market, if you have a good capability, I think you can continue to grow. On the mortgage business, the mortgage business continues to be slow. And actually, our mortgage growth for last year didn't even come in at $2 billion. I shaded it down to $2.5 billion, then I said it might be closer. We actually fell short of $2 billion. Bookings have been particularly slow. Overall, our new bookings have come in at least 30% to 40% lower than they were before the cooling measures.
As we pointed out earlier, the total book grew about $0.5 billion in the fourth quarter. And if you keep the run rate, then it's still looking at about circa $2 billion of mortgage growth. I think on the one hand, there are a lot of new developments which are supposed to come online. There were almost 65 projects was supposed to come online, all the old en blocks are coming online, so there will be supply. But at the same time, I think the total number of units that get traded this year will be somewhat slower. So circa about that, between $1.5 billion and $2 billion of mortgage growth is what I think we'll get.
Over here.
Aakash here from UBS. You expect healthy growth throughout 2019. How about the business environment in this quarter? Does this business environment continue since last quarter, or you're already seeing a change of business sentiment?
Well, business sentiment has improved a lot. So you can see that obviously the equity markets rebounded very strongly in January and the first half of February. And that obviously improves consumer confidence all around. Capital markets have opened up, so we've been able to start bringing DCM business back into the market as well. So overall business environment and sentiment turned around quite sharply from January. That having been said, in some areas, if you do a year-on-year comparison, it's not as strong as it was in the first quarter of last year. First quarter last year was gangbusters. So if you were to look at year-on-year, I think this quarter might still suffer compared to first quarter last year. But compared to the second half of 2018, things have quite clearly turned around.
Is there a final question?
This is [ Vicky ] from The Business Times. Mr. Gupta, do you see any black swan events?
The definition of black swan is you don't see it. I think there are a lot of risks out there. And I think many of the risks continue to be geopolitical risks. I think one of the big uncertainties to my mind is the China, U.S. tensions, and I'm thinking of beyond trade tensions. I think we are really in the middle of the whole Thucydides Trap problem. It is the rising power, dominant power problem. It is being manifested in terms of technology. There's quite clearly concerns around 5G robotics, IoT, et cetera. The U.S. attempt to focus on Huawei, for example, is just one manifestation of this. If you look at the period, therefore, going forward, where you wind up with some kind of a technology, cold war technology, iron curtain, and you have 2 blocks here, with China block, and then you have a non-China block or 2 Internets or 2 technologies or 2 -- that would be quite concerning for the region, in particular.
I think Asia has prospered well in the last 40, 50 years in a whole regime of geopolitical stability. And if you didn't have a regime of geopolitical stability, that would be somewhat -- there will be unexpected headwinds for the region as an example. So I think that risk is a real risk. I don't call them black swan because it is a known risk. Now whether it manifests itself and how it shows up, we don't know. But that's an issue. I think Europe continues to be a risk. I think the fundamental structural issues in Europe remain to be resolved. I think the main parliamentary elections -- the EU parliamentary elections are important, but it seems to me that you're going to find the parliament dominated by a lot of more hardliner parties, both left wing and right wing. And that itself is a manifestation of [indiscernible] in Europe around the EU project, around migration, et cetera. So I think those things have yet to be played out.
I think even on the financial side, I mean, growth rates have come off, but there is still issues. It may continue to be a challenge from a financial stability standpoint in terms of tech in the system. So Europe is still uncertain. Brexit is anybody's guess and would -- I tend to believe that the ramifications of Brexit for this part of the world are small, but you never know. So it's hard to figure out what that might lead to. There's still a lot of risk overall in the system.
Another question is, is DBS exposed to the electricity market to any of the clients? Are they exposed to the tumbling in -- tumble in the electricity power prices? Because the price has gone down quite a lot. So is there an exposure up to these sectors?
Yes, of course. There is even -- we have exposure to the power sector in general, yes, we do, of course, both through the large power generators, including the company which is currently facing problems also because of the same sector, we have exposure there as well. But we have recognized the challenges. We've circled them. We've had to restructure some of the -- then if you look at this thing, the real problem is a 3-, 4-year problem. It is a 3-, 4-year problem because there's an oversupply of gas and that all gas irritation results in overcapacity in the power sector, and that's creating this downward pressure on power prices. But that starts correcting by 2021, 2022. So you really have got to figure, do you have the wherewithal to manage between now and the next 2, 3 years? And we've done enough work with our clients and our exposure is to feel fairly optimistic that we will be able to manage through that.
Okay, that's all the questions we have. Thank you, everyone, for coming. We have refreshments outside. Please help yourself. Thank you.
Thank you, all.
Thank you.