A grim economic outlook threatens earnings growth for most of Asia's banks this year as loan growth stutters, asset quality worsens and the cost of credit rises.

"The risks for DBS lie in deteriorating loan quality as domestic economies slow, and from an earnings perspective lower fee income from wealth management and related products," said Michael Kerley, a fund manager at Henderson Global Investors, which manages $2.5 billion in assets in Asia ex-Japan and owns DBS shares.

DBS's quarterly results were the worst since October-December 2005 when it reported a loss due to goodwill charges to reflect the drop in an acquisition in Hong Kong.

Despite the poor numbers, DBS shares, 28 percent-held by state investor Temasek Holdings rose 2.8 percent in a broader market .FTSTI up 1 percent, as the result came above pessimistic forecasts. DBS shares halved last year and were the worst-performing local bank stock last year.

JPMorgan analyst Harsh Wardhan Modi, who has an "overweight" call on DBS, said the results removed fears in some quarters that DBS had large losses on its portfolio.

DBS's October-December net profit fell to S$295 million (US$195 million) from S$491 million a year ago. Analysts had estimated net profit of S$324 million, according to the average of six forecasts compiled by Reuters.

The result included charges for the falling value of its stake in Thailand's TMB and restructuring following 900 job cuts in DBS in the third quarter.

DBS Chairman Koh Boon Hwee said in a statement the bank was well placed to weather the uncertainties of 2009 after it boosted its books with a S$4 billion rights issue last month.

The bank's rivals report results later this month and are expected to show poor numbers.

HONG KONG WOES

DBS took S$269 million impairments on bad debts, a rise of 48 percent, led by higher charges for loans made to private banking clients and smaller-and-medium sized businesses.

The bank's Hong Kong unit led the rise in provisions, signalling a deterioration of asset quality in the bank's most significant market outside Singapore.

DBS earns 90 percent of its profit from Singapore and Hong Kong.

A boom in Singapore's property sector, which ended last year, also threatens to damage the banking industry as companies struggle to refinance debt.

Fitch Ratings expects the non performing loans ratio for Singapore banks to more than double to 3.5-4 percent by end-2009 from an historical low of 1.3 percent at end-September 2008.

DBS said quarterly net interest income grew 5 percent to S$1.12 billion, but fee and commission income dropped 31 percent to S$263 million, amid faltering capital markets.

Full-year net profit fell 15 percent to S$1.93 billion from S$2.28 billion in 2007 and compared with analyst expectations of around S$1.95 billion.

DBS shares dropped 42 percent in October-December, compared with a 23 percent drop in rival United Overseas Bank and a 30 percent fall in Oversea-Chinese Banking Corp. The benchmark Straits Times Index lost 25 percent.

Reporting by Kevin Lim

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