DBS Weighs Hedge Fund Prime Brokerage as Markets Trading Income Falls 65%

DBS prime brokerage is under consideration by DBS Group, which is weighing a move into prime brokerage for hedge funds and other institutional investors, CEO Tan Su Shan said at a briefing on the Singapore bank's third-quarter results, where markets trading income fell 65% year on year.

Prime brokers finance funds' positions, lend securities and handle custody and clearing for hedge funds and asset managers. DBS does not currently run a traditional prime brokerage, but Tan said the bank already has stock custody, market access and trading capabilities and is still weighing its options.

Tan described the idea as assembling businesses DBS already operates for institutional clients. According to The Business Times, she said "in Asia we have all the building blocks and we may put it together." She linked the idea to growth in the bank's foreign institutional investor and financial institutions franchises and to the financialization of Asian markets, describing prospects in institutional equities as promising.

The bank monitors trading in equities, derivatives and over-the-counter currencies with trade surveillance software it took from Nasdaq in 2022.

DBS prime brokerage would face concentrated incumbents

Any new entrant would face incumbents that already draw a large share of equities revenue from financing funds. The business is concentrated among Goldman Sachs, JPMorgan and Morgan Stanley, which in 2023 earned more than half of their equities revenue from prime services and futures as multi-strategy hedge funds grew. Goldman Sachs reported a 72% year-on-year rise in equities revenue to $6.44 billion in the quarter, driven mainly by prime and portfolio financing, its quarterly filing shows. Its equities financing line alone brought in $3.37 billion, or 52% of equities revenue, according to a calculation from the bank's figures.

Outside that group, Standard Chartered began with digital assets, acting 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.

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.

DBS's net profit fell 5% year on year to S$2.81 billion in the three months to September 30, 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 it was 2.6% of the S$5.85 billion total, according to a calculation from the bank's figures.

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%. 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.