DBS Group is weighing a move into prime brokerage for hedge funds and other institutional investors, its chief executive, Tan Su Shan, said today (Thursday). She spoke at a briefing on third-quarter results in which the Singapore bank's markets trading income fell 65% from a year earlier.
A prime broker finances funds' positions, lends them securities and handles custody and clearing , services hedge funds and asset managers buy from a small group of institutional brokers.
That business lifted Wall Street's equities desks in the quarter that hurt DBS. Goldman Sachs reported a 72% year-on-year rise in equities revenue to $6.44 billion, driven mainly by prime and portfolio financing, its quarterly filing shows.
DBS does not run a traditional prime brokerage today. Tan said the bank already has stock custody, market access and trading capabilities, and is still considering its options.
London's trading industry is coming home!
A Business Concentrated in Three US Banks
A new entrant would face lenders that already earn a large share of their equities revenue from financing funds. The business is concentrated among Goldman Sachs, JPMorgan and Morgan Stanley.
The biggest banks earned more than half of their equities revenue from prime services and futures in 2023, as multi-strategy hedge funds grew.
Outside that group, Standard Chartered has started with digital assets. The bank acted as credit intermediary on its first prime brokerage trades in spot bitcoin and ether through LMAX Digital in July, a pilot that tested margin management and settlement.
The scale of the incumbents shows in Goldman's third-quarter numbers. Its equities financing line alone brought in $3.37 billion, or 52% of the bank's equities revenue, by FinanceMagnates.com's calculation.
What DBS Already Runs
Tan described the idea as assembling businesses DBS already operates for institutional clients. She said that "in Asia we have all the building blocks and we may put it together," The Business Times reported.
- Banking Giant Committed Violations for 7 Years, Now Faces Punishment
- DBS Launches CBDC Merchant Collection Solution in China
- DBS Sees 80% BTC Trading Surge on DDEx Exchange in 2022
Part of that base sits in surveillance and execution. The bank monitors trading in equities, derivatives and over-the-counter currencies with trade surveillance software it took from Nasdaq in 2022.
Tan tied the idea to growth in the bank's foreign institutional investor and financial institutions franchises, and to the financialization of Asian markets. She described the bank's prospects in institutional equities as promising.
The potential clients are close to home. Singapore has been competing with Hong Kong to host Asia's hedge fund managers, offering its variable capital company structure and predictable regulation to funds that use prime brokers.
Profit Misses Forecasts
Net profit fell 5% from a year earlier to S$2.81 billion in the three months to September 30. That was below the S$2.95 billion average forecast in a Bloomberg survey of eight analysts, The Business Times reported.
Markets trading income dropped to S$152 million from S$439 million, which DBS attributed to unfavorable equity market conditions. Tan also cited softer Asian asset markets and a sharp rise in interest rates late in the quarter.
Trading accounts for about 6% of total income, Tan said. In the third quarter alone it was 2.6% of the S$5.85 billion total, by FinanceMagnates.com's calculation from the bank's figures.
The client side of the markets business moved the other way. Treasury customer income rose 21% year on year to a record S$2.62 billion in the first nine months, the bank's results presentation shows.
That line includes equity capital markets, the DBS Vickers brokerage arm and the DBS Digital Exchange, where bitcoin trading volume rose 80% in 2022.
Net interest income rose 4% to S$3.71 billion, though the net interest margin narrowed to 1.87% from 1.96%. Analysts had expected margins at Singapore banks to stabilize this year, and Tan said net interest income had passed its trough.
Nine-month net profit reached a record S$8.82 billion, up 2%. DBS expects total income to grow by a mid-single-digit percentage in 2027.
Chairman Peter Seah will retire after 16 years in the role, and board member Anthony Lim will succeed him on January 1.
