POOR economic growth is showing up in OCBC Bank's first-quarter results with a jump in bad debts and a fall in loans. OCBC also took a hit from lower contributions from its insurance unit Great Eastern, due to unrealised mark-to-market losses on its bond and equity portfolio.
The second Singapore bank to report Q1 earnings, OCBC said on Friday that net profit fell 14 per cent to S$856 million from a year ago, missing forecasts. The bank said its smaller profit reflected lower insurance income and a rise in bad debt charges.
Five analysts polled by Reuters had an average forecast of S$934 million while Bloomberg's average (also from five analysts) was S$899 million.
Smaller rival United Overseas Bank (UOB), which posted results on Thursday, saw its Q1 profit fall 4.4 per cent. DBS will report its earnings next Tuesday.
OCBC said bad debt allowances more than doubled to S$167 million from S$64 million and the non-performing loan (NPL) ratio surged to one per cent from 0.6 per cent, mainly from its oil-and-gas (O&G) exposure. Loans fell one per cent to S$208.1 billion.
NPLs increased from a year ago, reflecting economic conditions and the significant decline in commodity prices - which particularly contributed to the stress in the O&G support services portfolio, the bank said.
"Market is indeed weakening. The oil-and-gas issue has not broadened, but deepened," said Samuel Tsien, OCBC chief executive, at an earnings briefing. He noted that of OCBC's higher one per cent NPL rate, 0.43 per cent was from its O&G exposure. Other bad debts were from consumer and small businesses, like trading companies, he added.
As at March 31, 2016, the absolute amount of NPLs was S$2.15 billion - up from S$1.97 billion in the previous quarter and S$1.35 billion a year ago. Most of the year-on-year increase in NPLs were from the downgrades of a number of large corporate accounts in the O&G support services sector, which required their loan repayment terms to be restructured.
Mr Tsien said OCBC's oil-and- gas exposure was S$12.4 billion, or 6 per cent of total loans.
The offshore services sector made up 47 per cent of the O&G exposure or S$5.8 billion. Within offshore services, 15 per cent was classified as NPLs, or S$870 million.
Overall, oil & gas NPLs totalled S$897 million, or an NPL rate of 0.43 per cent. The O&G NPL rate worsened from 0.39 per cent or S$800 million in Q4 2015.
Of the total amount, 61 per cent (S$547 million in loans) is still being actively serviced, including 58 per cent (S$520 million in loans) still servicing interest as well as some principal.
Mr Tsien said oil prices have improved from around US$30 per barrel in February to US$40, and some customers are able to negotiate longer-term charters. Most customers are part of larger groups and able to pull in resources, he added.
On loans, his assessment is that growth will be "quite subdued" given lower growth in Malaysia, Greater China and Singapore. Indonesia is the only bright spot with expected 5 per cent growth this year, he said.
Mr Tsien noted that Indonesian President Joko Widodo, who has been in power for some 18 months now, has increasingly been able to implement his policies. This will result in more private investments, leading to higher loan demand.
OCBC NISP, the bank's Indonesian unit, grew loans 22 per cent while net profit rose 18 per cent to S$39 million, contributing 5 per cent to the group.
OCBC Malaysia's loans rose 6 per cent but net profit fell 10 per cent to S$76 million. Its profit contribution to the group was 9 per cent.
Mr Tsien said he is cautious on the outlook for Malaysia but "fundamentally, it's a country we like" and will continue to invest in.
OCBC Wing Hang, the group's Hong Kong bank, posted a 15 per cent fall in net profit to S$66 million. Greater China customer loans fell 9 per cent due to lower trade loans, and a weaker US dollar and Hong Kong dollar.
Another poor performer was the bank's insurance unit Great Eastern. Its earnings fell S$108 million or 59 per cent from a year ago to S$73 million.
Regional economies are sluggish but Mr Tsien noticed that Singapore companies are more willing to invest overseas, particularly in London, New York, Los Angeles and Sydney. Lately, he has seen movement to Japan.
He said the investments overseas are in the hospitality sector, hotels, student housing, commercial buildings and private homes - all in cities where OCBC has a presence.
Asked about OCBC's exposure in London and the impact should the UK vote in June to leave the European Union, Mr Tsien said it would be immaterial as the bank's business there is banking South-east Asian customers.