Net income advanced to S$933 million ($751 million) in the three months ended March 31 from S$807 million a year earlier, the Singapore-based lender said in a statement to the stock exchange today. That exceeded the S$755.2 million average of six analysts’ estimates compiled by Bloomberg.

These are “clearly a good set of numbers but the results may not be enough to dispel the current market concerns surrounding the offer price for the proposed acquisition of PT Bank Danamon (BDMN),” Kar Weng Loo, a Singapore-based analyst at HSBC Holdings Plc, wrote in a note to clients.

DBS is paying more for Danamon than the median book value for banking deals over $1 billion as it seeks to diversify away from Singapore. DBS Chief Executive Officer Piyush Gupta said this week that earnings per share may be lower for two years after the takeover, while adding that his bank is paying fair value given Indonesia’s “high-growth, high-return market.”

Trading income climbed 13 percent in the quarter to S$292 million, DBS, Southeast Asia’s largest bank, said in today’s report, driven by the sale of treasury products. Financial markets rallied worldwide in the period as Europe’s debt crisis eased and U.S. unemployment fell, helping to boost trading revenue at lenders including Bank of America Corp.

Interest Income

Net interest income, the difference between what a bank makes from lending and what it pays on deposits, grew 19 percent at DBS last quarter from a year earlier to S$1.3 billion.

Net fees and commissions declined 2 percent to S$406 million as earnings from stock broking, investment banking and fund management dropped.

Loan books grew 25 percent from a year earlier to $200.7 billion. That compares with an average 22 percent for the previous four quarters, according to data compiled by Bloomberg.

Profitability on loans, or net interest margin, narrowed to 1.77 percent for the bank, which derived more than 80 percent of its 2011 revenue from Singapore and Hong Kong. DBS is buying Danamon as part of efforts to expand in markets with higher margins.

Offer Premium

The Singapore lender, which state-owned Temasek Holdings Pte has the biggest stake in, offered to pay its parent company 45.2 trillion rupiah ($4.9 billion) in new shares for its 67 percent stake in Jakarta-based Bank Danamon. It also made a cash offer for the remaining stock for 21.2 trillion rupiah in cash at a 52 percent premium from the previous closing price. Temasek will increase its stake in DBS to 40.4 percent from 29.5 percent.

Earnings growth may lose momentum on costs relating to the purchase of Danamon as well as slowing credit expansion and higher provisions for bad loans, analyst Wee Siang Ng said before today’s numbers were published.

“The Danamon deal will be a drag on earnings this year, though this drag will be more visible in 2013 and 2014,” said Ng, an analyst at BNP Paribas Securities Singapore Ltd.

Acquiring the Indonesian bank will help DBS add 3,000 Danamon branches to its network in an economy that grew last year at 6.46 percent, the fastest pace since before the 1997 Asian financial crisis. By contrast Singapore grew 4.98 percent, and the expansion will slow to 2.8 percent this year, according to economists surveyed by Bloomberg.

The Indonesian central bank said this month that bank mergers should also bring more access for the nation’s financial companies seeking to operate in Singapore. Mahendra Siregar, Indonesia’s deputy finance minister, expressed concern that the country’s financial institutions could lose their national identity in cross-border deals.

“The operational outlook for the business looks fine,” Matthew Smith, a senior analyst at Macquarie Capital Securities Singapore Pte, said of DBS. “But there are headwinds in getting approvals for the Danamon deal and integrating the business. That’s a big project.”

To contact the reporter on this story: Sanat Vallikappen in Singapore at vallikappen@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

http://www.bloomberg.com/news/2012-04-26/dbs-quarterly-profit-unexpectedly-climbs-16-on-interest-income.html

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