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Edited Transcript of D05.SI earnings conference call or presentation 13-Feb-20 3:45am GMT

Full Year 2019 DBS Group Holdings Ltd Earnings Call

SG Feb 15, 2020 (Thomson StreetEvents) -- Edited Transcript of DBS Group Holdings Ltd earnings conference call or presentation Thursday, February 13, 2020 at 3:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Piyush Gupta

DBS Group Holdings Ltd - CEO & Executive Director

* Sebastian Paredes

DBS Bank Ltd., Hong Kong Branch - Chief Executive

* Sok Hui Lim

DBS Group Holdings Ltd - CFO

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Conference Call Participants

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* Aakash Rawat

UBS Investment Bank, Research Division - Director and Research Analyst

* Harsh Wardhan Modi

JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials

* Jayden Vantarakis

Macquarie Research - Head of Research

* Krishna Guha

Jefferies LLC, Research Division - Analyst

* Nicholas Lord

Morgan Stanley, Research Division - Head of ASEAN Banks Research and Executive Director

* Robert P Kong

Citigroup Inc, Research Division - Director and Deputy Head of Regional Financial Institutions

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Presentation

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [1]

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Hi, everybody. This is Piyush, Sok Hui and the team at DBS. Happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from UBS. Aakash Rawat.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [2]

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Great. I have a few questions. Firstly, on the revenue. You mentioned the moratorium on the principal down payments. It didn't seem that it was accounted in the 2% impact. Could you help us understand what will be the impact of this moratorium on earnings directly?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [3]

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Actually, there is no impact on earnings. There's certainly a moratorium on principal repayments, the interest payment keeps coming in. That's what goes into the income line.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [4]

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Okay. Great. The second question is on the NIM. So your guidance is 7 basis points. If I remember correctly, it was based on one fed rate cut assumption. Is that still the case?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [5]

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Yes. So we haven't changed the guidance, really because it's hard to call what will happen in the rates. It was built on 1 fed rate assumption. It looks like there might not be a fed cut at this point in time. I think the fed is on hold. And if you look at the data and the last reports data -- job reports data and overall economy looks quite robust. So they might not have a rate cut. On the other hand, quite clearly, there's a easing of monetary policy from a lot of the other countries in the region. So it's a little bit hard to call what net impact that might be -- might have. Interestingly, for the last couple of months, through December and Jan, both HIBOR and the Singapore rates stayed up. They're quite robust. So we did not see the drop-off that we might normally have expected. So at this point in time, we're maintaining that 7 basis point guidance, but depends on how things go, there might be a basis point or so upside on that, but hard to call.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [6]

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Okay. Got it. And then there was a certain drop of around 11 basis points in your funding cost for deposits Q-on-Q. Could you help us understand what happened there?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [7]

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Do you have that? Overall rates are coming down. Remember, we see LIBOR cuts, right? So the October -- cut through the first week of October and when rates come off, there's a general lowering of the interest rate. So if you look at our yields, our assets are also down and our cost of deposits is also down. And that just reflects the reduction in the interest rate environment, I think.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [8]

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So there was no mix change that drove that?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [9]

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No. There was no mix change. If anything, our CASA was actually quite robust in the fourth quarter, but it's not material enough to result in a big drop in costs.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [10]

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Okay. And I think some investors were expecting a strong trading quarter as well given the kind of environment we have seen in other markets. Why would you think that didn't really come through?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [11]

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Sorry, I didn't get that.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [12]

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The trading income?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [13]

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Well, I think the trading income was strong really only in the U.S. And I think there's partly a base year effect relative to the fourth quarter of the previous year and partly because the repo market in the U.S. spiked at the end of the year. So I think that gave people some opportunities. We did not see those. So our fourth quarter was fairly consistent with our normal fourth quarter, which means that December was very slow.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [14]

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Okay. Got it.

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [15]

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And speaking of -- from a very strong third quarter, whereas I think most of the global banks came off a much weaker third quarter and, therefore, showed much bigger improvement in the fourth quarter.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [16]

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Understood. I have a couple more questions on asset quality and Hong Kong then. So on the asset quality side, could you help us understand the $77 million write-back from ECL 1 and 2 provisions? What really drove that?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [17]

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Well, I'll let Sok Hui answer that, but basically, here is one of the problems I said before. In the old days, our general provision we used to just take flat at a macro level based on the portfolio. The way ECL was now, it is assigned to a particular loan. And therefore, that ECL has to follow what happens to the loan. So if the loan moves out of -- into NPL, then you got to reduce ECL because it goes into SP. If the loan volume drops then you got to reduce ECL because of the outstanding residuals. And if the loan gets upgraded, then you got to reduce ECL. So it's a very formulistic-driven thing. You can't control it very much. But -- Sok Hui, you want to add to that?

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [18]

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So the way our model works ensures that as the case progresses from stage 1 to stage 2 and then into NPL, but the time it hits NPL, essential part of the specific provision will already have had general allowances already taken in the second stage. And therefore, it's released into the first stage. So it is actually natural as you see sort of stage 2 loans going to NPL that there will be a release from general provisions. And depending on the period concerned, sometimes, this is offset by other factors, for example, management overlays that we took in some instance for the U.S. trade war as well as the Hong Kong social unrest. So it helps to sort of fluctuate. In the fourth quarter, it was purely due to the switch.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [19]

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Okay. Understood. And the last one is on Hong Kong. I just want to understand, I mean, given Hong Kong has already been in a recession for almost 6 months now, how come the Hong Kong revenue is still quite resilient and steady? And the second part of the question would be, if this combined effect of protest and the wider situation leads to a deeper-than-expected recession in Hong Kong, what would be your thinking around what could happen to earnings in Hong Kong in that scenario?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [20]

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I think you got to recognize that the large part of our Hong Kong business is really China. If you look at, therefore, the domestic Hong Kong economy, we have a consumer franchise, it's not very big. We have -- the Wealth absolute business is a driver of that. But at the corporate side, this is the larger part of the business, it generally is a function of what's happening in China. China grows at 5%, 6%, that really drives our Hong Kong business and growth. And irrespective of the protests and so on, the China economy has been doing okay. So you might see some impact of that, the various spillover into Hong Kong. But like I said, I think that will be a transient, not consistent. Also from a rate standpoint, HIBOR has been firm just because liquidity in Hong Kong has been tight. Hong Kong monetary aggregates are down. I think some of it is (inaudible), but some of it, I think, is also money being sent out of Hong Kong going back into China. But nevertheless, irrespective of what, HIBOR has been strong, and that obviously supports our results as well. Is Sebastian on the call? Maybe not. Okay. I think that's it. I'm not sure, unless Sok Hui want to add.

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [21]

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No, no.

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Operator [22]

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Next, we have Harsh from JPMorgan.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [23]

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A couple of questions. First is cost of funds came off quite a bit, 11 bps on deposits. Do you think there is more leeway for that number to come off?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [24]

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I just answered that question, Harsh. I think cost of funds only reflecting a cut in the interest rate, the LIBOR rate environment. The third cut came in the third week of October. So that didn't take us through entirely. So maybe there's some impact of that coming to the system. But it really reflects the macro trend, that's all.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [25]

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And because I see the asset yields declined so much sharper. A lot of it was offset by cost of funds. So I'm trying to kind of go back to an earlier question on margins that, is it -- is that the 7 -- 6, 7 bps year-on-year is that still fair? Or you think the risk is biased one way or the other to that guidance?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [26]

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Harsh, that's my point, right? When you have 75 basis points cut in LIBOR that shows through in the asset book and in your deposit book. So I'm not sure why is it so surprising to you that if asset yields came down, why should cost of funds or deposit yields also come down, quite logical. And I just answered that question a few minutes ago about bias, and I don't know, I'm still guiding 7 basis points. I think there could be some upside, but I don't know what's going to happen to the local Asian rates. So it's hard to make a call. I mean, all the central banks will probably ease monetary policy. So while SIBOR and HIBOR might hold up, I might see some headwinds in China, Taiwan, India, Indonesia. So I don't know if that will eat up the 1 basis point or so upside that we might have seen.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [27]

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Okay. Okay. That's fine. The second thing is on the IFRS 9 with the Hong Kong protest and with, as you said, bigger part of book is Greater China. Does that increase the risk of any kind of macroeconomic adjustment? Or is it already taken in fourth quarter? And how should we think about those shifts?

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [28]

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So we have taken in the general allowances for the sort of 2 big things, right? One is the U.S. and China trade tension as well as the Hong Kong social unrest. So we have actually taken them in the earlier part, not in the fourth quarter itself.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [29]

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Right. And if -- let's say we do...

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [30]

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(inaudible)

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [31]

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Okay. Okay. That's fair. Now if we do see sharper deacceleration, especially in mainland China, how much -- is it possible to quantify how much of incremental macroeconomic variable changes can impact your ECL?

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [32]

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I think we have to assess, I guess, there's a lot of judgment involved in how we take management overlay. But because the U.S., China trade tension as well as the Hong Kong social unrest will cover a large part of the customers, I suspect if we were to take anything, for example, for this sort of coronavirus situation, we will release some of the earlier provisions that have already been taken because they're overlapping names.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [33]

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I think the point is that if we see portfolio deterioration that should result in ECL increase, in fact. And so I think, Harsh, Sok Hui's point is only that, that we have preempted that. We've built up adequately large buffer for these uncertainties. So if you do see portfolio deterioration and (inaudible) as well, I think a buffer should be able to take care of most of that.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [34]

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Okay. The final one is more on the moratorium. Does the fact that somebody goes into moratorium on principal or interest, does that lead them to classify as stage 2 loans upfront. So for example, with $20 billion in F&B retail that you're talking about, $2 billion out of which may be at risk, how will that -- would you end up -- would you need to classify them as stage 2 preemptively? Or how does that part work?

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [35]

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We will not need to because we are talking about liquidity relief for our customers. We're not talking about clients where they will see a significant deterioration in our credit. So I don't think we will be taking sort of a debt portfolio of names just because it's got a moratorium into stage 2.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [36]

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Right. And -- but for the F&B exposure of $20 billion. And within that, the most...

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [37]

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It's not F&B exposure of $20 billion. Sorry, let me correct that. There's no F&B exposure of $20 billion. I don't know where you got that from.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [38]

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So sorry. The media briefing -- actually maybe I heard it wrong. My sense was, it was close to $20 billion on F&B retail exposure, where you said you have hotels.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [39]

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I did say in a range of industries, F&B is a very tiny part of that. So includes the airline sector, includes retail, it includes malls, it includes tourism, it includes a whole bunch of industries.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [40]

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Okay. So out of that, that $20 billion, you said $2 billion is potentially at risk. So would you have to classify them proactively as stage 2 or not really?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [41]

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Not really. So I am just giving you a sense of back to the envelop work we did in 2 days thing, which of these companies could have stress. So this is a very hypothetical could have state. It depends on how much there is -- of course, some names in that we've moved down, in which case, we'll classify them. But if we started classifying everybody we think could have stressed, I would have like tens of billions of dollars in stage 2. That's now how the process works.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [42]

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Right. Right. Okay. The final question...

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [43]

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Yes. So we have a process where we watchlist some of the names for this kind of reason, but it continues to remain in stage 1. They don't go to stage 2 unless we see that the credit spending has actually deteriorated.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [44]

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Okay. Okay. Final question is on the $575 billion -- million, sorry, of new NPA formation during the quarter. Which were the more chunkier portions of that? And how do we see that number in next 3, 6 months?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [45]

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Actually, the bulk of that -- a large chunk of that is a single name. It's episodic property named in Singapore. They actually haven't defaulted. There was a covenant breach and just for precaution, we had to move it into NPA. We didn't take any provisions against that because it is completely secured.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [46]

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Okay. So that has become current later on? I mean should we expect that number to decline dramatically in first quarter? Is that fair?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [47]

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No. It hasn't become current. It was current all along in the sense that they haven't defaulted or been overdue on their payment, but they've breached the covenant. And because of the overall stress in the environment, we moved it to nonperforming. So it's a precautionary move, if you will. But it's a decent building. It's a well-secured loan. So I'm not concerned about it early.

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [48]

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So specific provisions is at 0 and will continue to be at 0 based on how we assess the coverage that we have given the collateral value.

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Operator [49]

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Next, we have Jayden from Macquarie.

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Jayden Vantarakis, Macquarie Research - Head of Research [50]

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So I have a few questions. The first is to follow-up on the moratorium. Obviously, the bank has got really good market share in domestic mortgages in Singapore, and if you're giving all the customers at 6 months, I guess, moratorium paying principal, does this add much to the loan growth that we should see because the balances will still be there and you'll be booking new business, I presume? So do you think it changes the loan growth guidance very much?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [51]

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We don't record, but look it's not -- we're not giving the moratorium to everybody. It is available to everybody. So we give the moratorium to people who ask for a moratorium. And it's unclear what percentage of the people will actually ask for a moratorium. So this is really a community relief kind of effort. But you're right, to the extent anybody does, that will just extend the life of the loan. And so I think that this normal rate will stay on the books for longer. So it should help the actual asset balance. I haven't had any time to try and figure how much that might help or not. Because frankly, I don't know how many people will take it up.

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Jayden Vantarakis, Macquarie Research - Head of Research [52]

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Well, maybe just a follow-up. What's the sort of duration of the book of the mortgages that you've got? Is it quite long?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [53]

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The contractual duration is very long. The empirical duration is about 4 -- mostly will refinance in about 4 to 5 years. So the empirical duration is about 4, 4.5 years. Though contractual duration, obviously, some of the loans are the long-term loans.

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Jayden Vantarakis, Macquarie Research - Head of Research [54]

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Okay. And just a follow-up question on the deposits cost. During the media briefing, Sok Hui mentioned that there was some re-profiling of institutional banking deposits that happened last year and some of the benefits of that came through and helped to structurally lower the book a little bit. Is there much that's left to do? Have those deposits all been sort of the higher sort of more yield seeking ones let go or re-profiled? Or can you sort of give us some more color if there's anything else you could do on that front?

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [55]

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I think, we have sort of meetings have said that some of our deposits are high cost and depending on the cost you can get on commercial paper, these are perfectly substitutable. So we can let sort of some of the higher-cost deposits run off and replace them with commercial papers, if we need to. So that's just the context of seeing some of our deposits are actually substitutable for capital market instruments.

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Jayden Vantarakis, Macquarie Research - Head of Research [56]

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Okay. So I guess, then most of it would be already achieved? Is that a fair assumption?

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [57]

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I think we monitor the situation from time to time.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [58]

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We have more capacity to borrow in the CP market. So we've certainly not capped out of what we want to do. And this is (inaudible) whether they want to go for the high-cost FDs or whether they want to go for the CP market from time to time. That's our assumption. But it's not in a structural business. From a structural business standpoint, we keep trying to drive our CASA growth. That growth has been fairly consistent. It's continuing to do well because our cash management businesses are bringing in good CASA. So it's continuing to do well, but it's steady.

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Jayden Vantarakis, Macquarie Research - Head of Research [59]

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Yes. And my final question, just on the call as well you mentioned about credit card transactions coming down, which I think is entirely logical in the current environment. Do you have any sort of sense of what sort of quantum or proportion of decline should we expect to see during the first half? Obviously, the bank is doing a really good job on credit card fees and it's a consistent driver. So any color would be helpful.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [60]

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So far, I just checked the data, not seeing anything in Singapore yet, but I don't have up-to-date data. In Hong Kong, where we're just seeing is we're seeing a decline of 5% to 7% in spend relative to what we would have expected.

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Jayden Vantarakis, Macquarie Research - Head of Research [61]

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And just for context, how much is Hong Kong relative to the other markets?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [62]

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It's about -- it's a big chunk. Singapore is our biggest. For a total $8 billion, the cards portfolio is about $6 billion -- $5 billion or $6 billion. And Singapore is about $3 billion or $4 billion, Hong Kong is about a couple.

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Operator [63]

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Next in queue, we have Robert from Citi Research.

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Robert P Kong, Citigroup Inc, Research Division - Director and Deputy Head of Regional Financial Institutions [64]

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And I wish everybody well at DBS and hope you will stay safe. I have 3 questions. First of all, could you perhaps -- and well, thank you for raising the dividend by 10%. Could you perhaps sort of indicate some of the underlying assumptions that you've made on the dividend because, obviously, this is something you intend to sustain? So what are you thinking about for stable ROEs? What sort of ongoing loan growth or RWA growth and so on and so forth? Second question, I've been surprised that Singapore SIBOR has held up very well. I think there's still a 20 basis points gap over SOR, but of course, MAS last week has basically very much trying to talk the market down, and I believe that if they need to, they can also inject liquidity to push this thing lower down. So I wonder how you think about where SIBOR or SOR is? As I mentioned, it's probably stayed up a bit more resilient than we thought. And then final question, please, could you just put a bit more color on what you guided in the media briefing around the basis points of additional credit costs? I think you said the base case is 4% to 5%. I think you said worst case may be a high single digit. What were you thinking within the 4% to 5%? Is it your sort of the first stage rather than the second and third derivative impacts that you talked about?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [65]

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Can you just take the dividend?

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [66]

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We sort of announced an increase in dividend. We have done a lot of simulations, and we are confident that we can sustain the $1.32 per share at this level. So as far as the (inaudible) continuing to grow and it's not sort of -- our payout ratio is not out of range, and we keep our card ratio at the guidance that we've given of 12.5% to 13.5%, we are quite confident that we can keep to the higher dividend that we just announced.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [67]

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So -- sorry, our capital adequacy is up to 14.1 at this point in time. And we keep accreting profits. Even if we assume we have no profit growth, we made $6.4 billion last year. And so we're still accreting profit. And if we -- even at this rate, even at $1.32, we will actually be accreting profit. So we have a lot of capacity to be able to maintain the dividend and hopefully, continue to grow it consistently with growth in our earnings.

Your second question on SOR, SIBOR. We've talked about this before. The SOR is actually, in Singapore, not driven by MAS policy. It's driven by currency. And it's really, right now, a function of a weakening Sing dollar. That's what's keeping SOR up. Sing dollars weakening against U.S. dollar, and that essentially is resulting in a strong SOR. And I think that anchors the rest of the rate spectrum in Singapore. So unless you figure that Sing dollar starts strengthening relative to the U.S., I think you might see some support for the Sing dollar rates. I don't think that's going to change in a hurry. Remember, the weakening Sing dollars is the MAS's way of monetary policy tightening in a very -- it's an anomaly, but that does results in higher interest rates.

On the credit cost, yes, as I said, the 4 categories I talked about on the call. Of those, 2 of the categories, our expectation is that increased FDs will be de minimis. That is the manufacturing sector to supply chain. Because like I said, we went through our setup. The kind of companies we have, we think 3, 4 month shift in the production cycle backward, so operating at 60% capacity, whether it's auto sector or the TMT sector. I think they have the resilience and the thing to be able to last, and it's not going to have an impact in terms of incremental provision. And the third was the macro, which is oil prices coming off overall shipping slowdown.

Again, early read of our portfolio is that the quality and nature of our customers. We're dealing with the oil giants and some of the big shipping companies. We don't expect any incremental provisions on those 2 accounts really. So the provision we've estimated out on the other 2, one is the consumer services sector, which I point out, not your SMBs, everything including aviation and tourism and retail and malls and everything of that nature, hotels and so on.

Again, a lot of our clients are in that. These are, as I mentioned, people like Shangri-La Hotels or people like Genting Group or people like Singapore Airlines or Cathay. I don't expect them to actually wind up taking provisions for us. So it is that $2 billion part of portfolio who's slightly smaller where there will be some stress and pain.

Now early, to figure out we did some ways, of course, once we came up with a number. But we think we could get some provisions out of that bucket. And the last is the consumer delinquencies. This is the same consumer unsecured credit card and unsecured book I talked about. We're not seeing anything right now, but my general thing is if you see people not being able to get to work or temporary laid off, or contract people not working, et cetera, you should expect to see some pickup in delinquencies.

And so we just made an assumption, if it goes up by 2 or 3x -- which is, by the way, we sort of benchmarked what happened in (inaudible) and based on that, how much could that be? And you put that together, you get a figure of somewhere in the region of 150-odd million, maybe between both of those. That's why I got back and said, no, 4, 5 basis points is what you might get. Now that's how I worked out this number. Now it's not entirely scientific because this has all been relatively history. And therefore I said, this is not scientific, maybe you're wrong and maybe could be double that. Well, double that would be $250 million, $300 million. And we do have the reserves to be able to take that kind of challenge.

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Operator [68]

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Next in queue, we have Nick from Morgan Stanley.

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Nicholas Lord, Morgan Stanley, Research Division - Head of ASEAN Banks Research and Executive Director [69]

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I also have 3 questions. The first is just if you could talk through what happened on the Hong Kong margin. Obviously, it was down about 7 basis points or so -- sorry, about 10 basis points Q-on-Q, and that's obviously after a fall in 3Q as well. Is it just related to the movement in rates? Or was there something else happening there?

My second question is just coming back on the classification of loans when you put them under moratorium. Am I assuming that they don't go into NPL, given the answer to Sok Hui's question. So if you could just talk about how you classify it as a performing or nonperforming. And then the final question is just on loan growth. I mean, I presume if you're extending credit for relief, you're not going to charge fees. So if you could just talk a little bit about what's happening to loans year-to-date. Is there a decrease in demand, given what's happening? And would the lending fees, therefore, be impacted in the next quarter or so.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [70]

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So Hong Kong -- actually, Sebastian just sent me a text saying he's on the line. But he's not able to get through the administrator. So can the administrator see if Sebastian can get on the line, he might be able to answer the question. In the meantime, Sok Hui, you want to talk to...

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [71]

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Yes. So Hong Kong, when you recall, it has some 60% of the deposits in low-cost CASA. And as rates come off, these deposit margins will actually go down. So in the fourth quarter, with the LIBOR rates actually having sort of declined, you see the 10 basis points decline in the net interest margin quarter-to-quarter.

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Nicholas Lord, Morgan Stanley, Research Division - Head of ASEAN Banks Research and Executive Director [72]

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So they're rate related, nothing else?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [73]

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Yes. It's all rate related. And the second question also, I think Sok Hui pointed out, we -- the moratorium, we've actually also had discussions with the regulator. We don't need to put it either into Stage 2 or into NPL, either of those. So you're correct.

Your question on loan growth. Actually, the momentum on the loan pipeline, as I indicated, is quite robust. You notice we got 2% loan growth in the fourth quarter, the strongest loan growth we had all year. And as we went into January, that loan pipeline continues to look relatively robust. Interestingly, even the mortgage in Singapore, which has been declining for 3 quarters, turned around in the fourth quarter. So we got some pickup. More important, the bookings picked up quite nicely. The first half of the year, bookings were down, but third and fourth quarter, bookings were quite strong. So we are almost 30%, 40% increase in bookings year-on-year as well.

So net-net, I think our original guidance that we should be able to get mid-single-digit loan growth for this year is for now intact. It all depends on -- if this under-capacity utilization continues, and therefore, people continue producing at 60%. That could have 2 contrarian impacts. On the one hand, if these guys still need liquidity, they might want to borrow from working capital, so that should help. On the other hand, it could well be that because it's running at lower capacity, they have less need for money. So I'm not exactly sure how that might play out yet. But overall, our pipeline is quite robust.

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Sebastian Paredes, DBS Bank Ltd., Hong Kong Branch - Chief Executive [74]

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Piyush, I think I have been diluted, so I'm on the line to answer questions.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [75]

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Okay. Sebastian, so I think next question on margin was Hong Kong margins are down quarter-on-quarter, is that only to do with the interest rate environment or is this something else? And Sok Hui just finished saying that it is really just the interest rate environment. You might want to amplify on that.

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Sebastian Paredes, DBS Bank Ltd., Hong Kong Branch - Chief Executive [76]

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No, that's correct. What Sok Hui said is right. That is the impact of the 3 rate increases, both HIBOR and LIBOR. And at the end of the fourth quarter, we saw that impact, partly offset by some of the IPO activity that pushed liquidity or drive liquidity up, but that's purely rate. And with respect to the initial question regarding of why our revenues are resilient through the year. I think that the -- you pointed out quite well. I would only add that there was a very strong capital market activity in the fourth quarter in Hong Kong, both on equities, M&A or debt, and insurance products derived from the social unrest. Chinese were very active on the insurance area. So all fees as well as capital markets and debt capital markets were very strong in the fourth quarter in Hong Kong.

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Operator [77]

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Next, we have [David] from [LTR Capital]

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Unidentified Analyst, [78]

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I just had 3 questions, really, one on costs, one on capital and one on asset quality. On the costs front, I guess, the full year revenue this year is going growing, for the sake of argument, around 1% or 2%. How are you thinking of flexing the cost growth? Is the cost-income ratio reasonable? And are you paring back any of your investment programs basically in order to manage that cost-income ratio?

On capital, your CET 1 is at 14.1% now, should we expect that to accrete further into again '20? And if not, how -- what do you intend to do, I guess, with your capital generation this year beyond funding the increased dividend and loan growth? And thirdly, on asset quality. You faced idiosyncratic issues in the past on [certain] exposure. So the coronavirus exposed sectors aside, are there any other sort of areas of the portfolio, in idiosyncratic terms, where you are keeping a closer eye on?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [79]

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So on the cost, I actually said this last quarter, we have some capacity to shave and tighten our belt. So last year, our total cost grew 8%, and we see we can knock that off by 2 or 3 percentage points without compromising our investment agenda. And that's through belt tightening or, as usual, general administration, people hiring and so on. And that we will do to bring the cost down.

However, we are not going to compromise on our investment agenda. Partly, we continue to grow and invest in the countries that we're trying to grow the digital offering. Partly, in Singapore with the digital banks coming in. We do need to make sure that we are adequately invested to defend against that. So as a consequence of that, we'd like you to see a deterioration in our cost-income ratio of this year, and we will live with that in the bigger scheme of things.

On capital, the reason we raised the dividend is that we figured that by accreting capital, we can afford to pay a dividend now. Because our policy is consistent. So we take a look every year and see how much are we accreting, what's the capital adequacy, and if we can afford to reward shareholders more, we do that. We just want to make sure we do it in a steady way, so we are not ever under the gun to have to cut dividend. So we never had to do it so far, and that's the last thing I'd like to do. And so it's a graduated increase in dividend payout, but that's what we should be looking to.

And finally, on asset quality, the only other thing which, again, we flagged earlier that we're watching very carefully, is the China default situation. Bond defaults have, last couple of years, been creeping up. I think with the new stimulus measures, they might actually reduce this year. But nevertheless, we've been struck that the Chinese government have been quite disciplined about letting companies default if they need to. And so that's one area that keep a very close watch on -- what companies, what customers who might actually run to trouble. Fortunately, we've been able to keep our noses clean in the last year or so. But that's obviously an area to watch on a continuous basis.

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Unidentified Analyst, [80]

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Sure. Can I have a quick follow-up on the capital point? I guess you're operating range is 12.5% to 13.5%, and you're running at 14-and-a-bit. In terms of that actual buff, is that merely a buffer against economic uncertainty? And have you sort of changed your thinking in terms of deploying that capital for basically inorganic uses?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [81]

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Actually, we flagged a couple of times last year that we will be open to looking at bolt-on deals if they came along. Our experience with the ANZ deal and before that the SocGen deal were both very, very good. We got very quick payback. And so I've said before, if we found appropriate bolt-on deals which are not huge, which could allow us to accelerate our growth in some businesses or strategic business we're interested in, we'd be open at looking at those. But that's not a change. We've already maintained that now for some time that, that's our stance.

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Operator [82]

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Next, we have Krishna from Jefferies.

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Krishna Guha, Jefferies LLC, Research Division - Analyst [83]

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Most of the questions have been answered, I have just a few. First is on the cost. I see that your staff cost, I think, has been growing in double digits, and staff count is about 6% growth. I wanted to know that -- the results have been quite good, so probably in a higher [third]. But in terms of just for your staff retention and all, are you seeing any competition from the new licenses or the various e-wallet players that you are seeing, and therefore, you have to pay a bit higher? That's the first thing.

And on a related thing, I saw that your card income has basically flattened -- is flat for fourth quarter. Now given that this is pre virus and typically people travel and all, and at the same time I think, you (inaudible) and transfer-wise launched those cards. Are you seeing any impact? Because I think credit card receivables did grow. So I was just wondering if there is any impact? And what's your response on that. Those are the 2 bits of questions.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [84]

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So on the staff -- or actually, the large part of our staff count is -- some portion of it, it's a line shift, because we continue to hire more engineers and tech people onto our roles. And that explains the large part, not just part of our income growth. We're just keeping on building the Hyderabad shop. I mean after 2,000 people, we hope to get to 2.5%, 2.7% by the end of this year. And that's a lot of skill set, we just think we need to in-source. So when we do that, we just don't pay for them externally, we bring them on a role as and when that happens.

On your related question on protecting staff, yes, you had to do that, both in Hong Kong last year with the virtual bank. And in Singapore this year, we've been preemptive. We have people who we think are likely to be wonderful, we've actually tried to be thoughtful about making sure that we can defend them. But it's not big in the scheme of things. So I don't think that's a large part of our costs. Of course, I don't see -- expect to see significant growth in staff costs from that account.

On the cards, maybe Sok Hui, you have this thing with the fees. I haven't noticed -- just anecdotally, we're not seeing the pressure. And yes, there's a lot of other players in the market, but our overall sales have continued to grow our market share on ENR as well as sales continued to be steady or upward. So that's not an issue. I suspect if there is a drop in fees, it must be to do with the accounting for fees in MasterCard, Visa, which may vary from quarter-to-quarter. It must be something to do with that.

So (inaudible), he was just asking something. What's the...

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Unidentified Company Representative, [85]

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There was a $9 million charge on fees where we had taken in the fourth quarter on account of excessive annual fee adjustments that we have done. So we have taken it up. We've taken a provision to get the fee income.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [86]

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So there's a one-off in there apparently. $9 million was the one-off in that number.

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Operator [87]

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Next in queue we have [Sanjay] from [LPR SG].

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Unidentified Analyst, [88]

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So one quick question on the write-off number in the fourth quarter, the $419 million. What drives that? Is there a discretion? Or is it also formulaic? And secondly, if you can give us a very, very quick update on the digital initiatives, the banking side in India.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [89]

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So the write-off number, to a large extent, is discretionary. So we make a judgment call every quarter on which portion of our NPL loans we just think are not recoverable anymore. And when it gets to that stage, this people take the discretionary view of saying we better write this thing off. So what we did in the fourth quarter, they went back and looked at some of the NPLs related to the oil and gas NPLs we booked in 2016, 2017, and they figured some residual ramp of that, which they thought was not possible to recover anymore, and wrote those off.

Your second question about digital initiatives in India. Actually, we've got 2 or 3 different things happening over there. One's on the consumer side, where DG Bank, as I mentioned before, we slowed down customer acquisitions. We're now acquiring for 40,000 a month, but the quality of an acquisition has proven to be much better. So we're getting customers with much higher month on book zero balances. And with the possibility that they will break even on acquisition costs in a year and on all variable costs in 2 years, so it's a much better customer profile than we were acquiring before. So that's good.

We also are getting some secured lending book. We've been doing digital lending in the unsecured space. We first started by doing white-listed customers that we acquired, the Digibank customers. Then in the last quarter, we opened it up to open market sourcing as well. And it's early days yet, but we do need to get some decent customer acquisition on the unsecured book. So that's on the consumer side of the business. But on the consumer side, we also have a small affluent business that also we digitized and equipped with an iWealth program. And so that's also proven to be actually quite good.

The other place we've worked on is on the SME side. SME side, again, we have a digital offering which allows digital onboarding, instant account opening. We've embedded our digital products into [tiny] images software package, which is widely used in India. So we get a lot of customer and acquisition through that. And again, in the last year, we've launched algorithmic underwriting on SME. So we're now able to do instant underwriting based on additional data, not just backward-looking financial data. And that business -- those businesses do quite well. We're getting very good momentum. The subsidization that we did, we're now up to 22 cities and 30 locations, and all of the new subsidiaries are also kicking in quite nicely to facilitate that SME buildout. So I'm quite positive about what we've been able to see in that space.

And the last area where we've actually done a lot of digital stuff is on transaction banking, particularly cash management, where through this API connectivity we offer into supply chains and payments, we are seeing good progress. Our total volumes on UPI are increasing, but also our participation in other supply chain is picking up steam. So if you look at our GTS business in India, that's actually, we need to get some momentum as well on the back of the digitization activity.

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Unidentified Analyst, [90]

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So both SME and consumer side, especially if you're doing unsecured, I guess, you must be getting better demand conditions, partly because the NBFC side of supply or financing is out.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [91]

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That's true. So we've actually -- not just in those 2, even in the large corporate, we've been able to improve margins in India because of the credit issues. So before NBFC is out, even some of the public sector banks are not doing a lot of lending. So we've been able to improve our credit spreads even in the large corporate space.

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Unidentified Analyst, [92]

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But overall, would you say, in this fiscal year, would the bank break even or another year to go on?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [93]

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No. No, no, overall -- on an overall basis, the bank makes money because the corporate business is profitable, it's only the consumer business that's loss-making. But overall, we made money last year. And the profitability this year will be much stronger. The question that you ask is when do you get the consumer business to break even, and the consumer business breakeven will still takes some years.

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Operator [94]

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Next, we have Aakash from UBS.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [95]

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Sorry, I just have one more follow-up question. You mentioned about the bolt-on acquisitions. And in the past, you've said that anything less than 5% of the market cap would be -- you would be comfortable with that. Is the thinking still the same on that despite the fact that you've stretched your payout like 55%?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [96]

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Yes. I think we can still afford to do deals up to that amount. Again, just to reemphasize, our conditions are still the same. It's got to be of strategic interest in businesses that matter to us and countries that are important. Second is that the number has to work. So we are -- we won't do a deal which never works. And third, we must have the management bandwidth to do it without distracting us from our digital agenda. And which is why it's just small ticket size. We don't do any big deal we won't be able to handle.

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Aakash Rawat, UBS Investment Bank, Research Division - Director and Research Analyst [97]

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Got it. Just on the strategic businesses and countries, could you give us some more specifics around it? Like what do you mean exactly which businesses, which countries, if you could?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [98]

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Well, of big businesses -- countries are only China, India, Indonesia, well, those are the 3 countries have interest in. And businesses include -- we're trying to grow the SME business, we're trying to grow the Wealth business, so that's the kind of stuff.

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Operator [99]

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We have Krishna from Jefferies.

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Krishna Guha, Jefferies LLC, Research Division - Analyst [100]

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Yes. So just one follow-up on Aakash's question previously. So will you be interested in looking at any stake in some of the platforms which can help you with the SME lending? You may not get the full ownership of the company, but just a stake. Will you be interested in that?

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [101]

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So it has to make -- first of all, it has to make economic sense. And also, we got to figure what incremental value the platform brings. Actually, I would look at anything, I'm not averse to it. But the number has got to work, the economics have to work and we're going to figure what the platform brings to us.

One of my big challenges with stakes has always been that -- I guess, 2 challenges. One is that if I don't control, then I'm a passive investor, and so it's hard to figure how I actually leverage that and grow that. And second is that the economics are sometimes really hard to make work when you go into the minority stake. So those come in the way of taking a small stake in something. However, as I said, that it was a really small ticket size when we bought 3% or 4% of (inaudible), which is the Singapore platform, which is -- now that's the small stake, but it cost us $2 million to $3 million, it doesn't move the needle. And it gives us a way to source payment business and so on. The small kind of things like that, we are open to look at. But those are neither here nor there.

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Operator [102]

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That's all the questions that we have for today.

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [103]

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Well, thank you for joining us for today. We will speak with you during the next results release which is during the second half. Thank you.

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Piyush Gupta, DBS Group Holdings Ltd - CEO & Executive Director [104]

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All right. Thanks, everybody.

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Sok Hui Lim, DBS Group Holdings Ltd - CFO [105]

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Thank you.

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Operator [106]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.