4 insights from OCBC's latest earnings

PHOTO: The Straits Times

The last of the three big banks, OCBC Bank (SGX: O39), reported its first-quarter earnings last week.

Just like the other two banks, OCBC's net profit was impacted by increased allowances for potential bad debts.

With more businesses suffering reduced demand, it's a matter of time before some go belly up, or have difficulties servicing their loans.

OCBC's CEO Samuel Tsien reminded us that the Covid-19 pandemic is both a health crisis and an economic one.

The group provided a sobering assessment of the current situation and what it expects in subsequent quarters.

Here are four interesting insights from OCBC's latest earnings report.

Group's results dragged down by insurance

The bank reported a healthy 6 per cent year on year rise in net interest income to $1.63 billion.

However, non-interest income tumbled by 24 per cent year on year to $864 million, dragging down total income by 7 per cent year on year.

As a result, operating profit was lower by 13 per cent against the same period last year, while profit before allowances weakened by 12 per cent.

OCBC increased its overall allowances for both impaired and non-impaired assets to $657 million, almost triple the allowances it booked of $249 million in the first quarter of 2019.

Because of this big jump in allowances, net profit declined by 43 per cent year on year.

However, investors should note that it was OCBC's insurance division, under Great Eastern Holding (SGX: G07), that dragged down the overall group.

Mark-to-market losses for the insurance arm resulted in net profit plunging 94 per cent year on year.

Diversified loan book

OCBC has a diversified loan book that spans across geographies.

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The bank's loan book saw a 4.6 per cent year on year growth to $271 billion.

Housing loans and building and construction loans made up 23 per cent and 25 per cent of the loan book, respectively, and make up the two largest components.

Oil and gas, a troubled sector at the moment, took up just 5 per cent of the loan book.

Other at-risk sectors such as shipping and aviation comprised just 2 per cent and 1 per cent of loans, respectively.

Growth in fee income

Fee income saw a healthy 10.3 per cent year on year growth to $546 million.

The increase was largely driven by a $70 million year on year increase in wealth management fees, despite assets under management dipping by 4 per cent year on year to US$104 billion (S$147 billion).

Fees from loan, trade and guarantees declined by $24 million and formed the second-highest component of fee income.

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This was offset by an increase in brokerage and fund management fees as volatility drove an uptick in trading activities.

Credit costs expected to exceed that of the Great Recession

Cumulative credit costs for the bank are estimated at 1 per cent to 1.3 per cent over the next two years.

This level is higher than that of the Great Recession in 2009 and close to the SARS crisis level of 2003-2004.

However, the bank does not expect credit costs to equal that of the Asian Financial Crisis in 1997.

Economic weakness and uncertainties are expected to push the non-performing loans (NPL) ratio to between 2.5 per cent to 3.5 per cent. The bank's current NPL ratio stands at 1.52 per cent.

Get smart: Vulnerable sectors require more vigilance

OCBC has provided a downbeat yet realistic assessment of how the pandemic will impact its business.

The group will remain vigilant on vulnerable sectors such as aviation, oil and gas and shipping to ensure provisioning remains adequate.

Cost management will be tightened further, share buybacks suspended and the dividend policy reviewed to help the bank to tide through these challenges.

For the latest updates on the coronavirus, visit here.

This article was first published in The Smart Investor.