OCBC sees margin pressure on Indonesian loan book

Singapore

THE more concerted push by the Indonesian government to limit loan rates to less than 10 per cent in recent times has put pressure on the net interest margin (NIMs) of OCBC's loan book in the country, said the bank's chief Samuel Tsien. (see amendment note)

This pressure "is continuing", said Mr Tsien on Monday, with the bank hopeful though that the weaker NIM performance will be held up by the expanding NIMs in the other markets of Singapore, Malaysia, and China.

Mr Tsien was speaking to reporters after the bank reported a 29 per cent boost in net profit for the first quarter to S$1.11 billion that met expectations based on a Bloomberg poll of analysts. This translated to annualised earnings per share of S$1.073 for the quarter, up from 82.1 Singapore cents in same period a year ago.

The gains reflected in part a 10 per cent boost in overall loans for the three months ended March 31, 2018, as well as stronger insurance performance and lower allowances.

Still, shares in OCBC closed sharply lower at S$13.17, down 3.5 per cent or 48 Singapore cents on Monday. Shares of DBS and UOB ended higher.

The bank reported a five basis point expansion of NIM to 1.67 per cent from 1.62 per cent a year ago; this was unchanged from a quarter ago. NIM reflects the profitability of the bank's interest-yielding assets.

OCBC's NIM was weaker when compared to its peers, both on the increase from a year ago, as well as on an absolute basis. DBS closed off the first quarter with an NIM of 1.83 per cent, while UOB posted the highest NIM of the trio with 1.84 per cent.

The pressure comes as funding costs for banks operating in Indonesia has broadly risen. An S&P report in March last year noted that in general, Indonesian banks had recorded strong NIM trends in 2016 that was driven mainly by falling funding costs. The margins were fattened previously as banks cut deposit rates more aggressively than lending rates.

Mr Tsien also noted that the overall loan book included more trade finance than before. Trade finance loans typically have a lower NIM than commercial loans.

Net interest income for the first quarter grew 11 per cent from a year ago to S$1.42 billion, while non-interest income rose 8 per cent to S$918 million. The non-interest income reflects gains in fee and commission income, thought some of it was offset by lower trading income and net realised gains from the sale of investment securities.

Its allowances for loans and other assets for the quarter were "very low", said Mr Tsien, at S$12 million, when compared to the S$178 million in allowance from the preceding quarter and S$168 million a year ago.

The bulk of the allowances in the previous quarters were set aside for bad loans in the offshore support services segment.

Profit from life assurance jumped to S$166 million from S$49 million in the first quarter from a year ago.

Mr Tsien noted that Great Eastern - the bank's insurance arm - has been able to switch to selling more high-margin insurance products, with the new business embedded value margin rising to 43.6 per cent from 39.6 per cent a year ago.

The group has also adopted the new accounting standard, the Singapore Financial Reporting Standards International, or SFRS (I), that should mean relatively less volatility in the reported numbers for the insurance business over time, moving from significant mark-to-market swings under the old rules. Darren Tan, OCBC's chief financial officer, said the adopted rules will reflect a better matching of assets and liabilities held by the insurer.

Amendment note: The story has been revised to clarify that the loan rates is limited to less than 10 per cent, not up to 10 per cent.

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