Loans, better margins lift banks' Q1 earnings

Singapore

LOCAL banks had their stars aligned in the first quarter of this year, as higher loan volumes and improved margins pushed up earnings.

Reporting the highest profit gain for Q1 2014 was OCBC Bank; its net profit rose to $899 million, an increase of 29 per cent from a year ago. Core net profit at DBS Bank climbed 9 per cent to $1.03 billion; including one-off items, it was up 30 per cent to $1.23 billion. United Overseas Bank (UOB) said net profit rose 9.2 per cent to $788 million.

The fact that the robust performance happened in a quarter of challenging fixed income markets, which has caused some global banks to stumble, was particularly sweet.

Bank stocks rose on the results. Leading the pack was UOB which rose almost 3 per cent, before easing to end up 2.7 per cent. OCBC shares gained a more modest 1.9 per cent while DBS was up 0.6 per cent.

Said DBS chief executive Piyush Gupta: "DBS has had a very solid start to the year. Despite challenging fixed income markets, quarterly earnings crossed the $1 billion mark for the first time, a testament to the strength of our franchise."

The deposit-flush local banks typically do well when interest rates rise since they can reprice loans upwards as well as enjoy gapping opportunities which is putting their excess funds to work in the interbank market.

"The improvement in net interest margin (NIM) from 1.64 per cent a year ago to 1.70 per cent was mainly attributable to higher loan spreads as well as increased income from money market activities and gapping opportunities," said OCBC Bank.

DBS' NIM of 1.66 per cent, up five points, was its best in six quarters due to repricing of loans and sale of higher fixed rate home loans. UOB's NIM improved three points to 1.73 per cent.

Loan growth for all three banks remained in double-digit terms, bolstered by faster gains in the regional markets.

OCBC posted 18 per cent year-on-year loan growth and 3 per cent on quarter. At UOB, it was 12.7 per cent on year and 3.6 per cent on quarter. DBS said loans grew 13 per cent from a year ago and 2 per cent on a quarterly basis.

Delving deeper, OCBC and UOB, which have large franchises outside Singapore, saw the fastest loan gains in those markets.

OCBC said growth was the highest in Greater China, up 74 per cent on year, and slowest at home, at 6 per cent. In fact, for the quarter it slipped one per cent.

UOB's loan growth was more consistent: Singapore loans were up 11.9 per cent on year and 3.4 per cent on quarter while regional loans gained 15.3 per cent on year and 4.5 per cent on quarter. UOB counts its loans based on where they are booked.

DBS said loans are classified according to where the borrower is incorporated, while OCBC said loans are based on where the credit risks reside.

DBS said loans rose 13 per cent on year and 2 per cent on quarter. Growth was due to Singapore corporates, trade loans and home loans. Its Singapore loans slipped fractionally for the quarter. The banks also addressed their burgeoning China-related loans amid concerns over slower growth in the world's second largest economy.

China grew 7.4 per cent in the first quarter of this year, the slowest clip since Q2 2012.

Speaking at its results briefing, DBS chief financial officer Chng Sok Hui said the bank has "done a deep dive and checked our China portfolio and we're comfortable with it".

DBS allowances for bad loans fell 32 per cent on year and were unchanged on quarter, in spite of a bigger loan book.

Elaborating, Mr Gupta said the trade loans are genuine and on average have been shortened to four months' duration. DBS has no exposure to China's shadow banking system, not via the banks it deals with, nor the companies it lends to, he said.

Of its $48.7 billion loans to Greater China, about two-thirds are trade loans, $13 billion are loans to state-owned enterprises and another $1 billion to property developers, said Ms Chng.

OCBC chief executive Samuel Tsien said the bank wants to attract top corporations in China that are venturing abroad, as that plays to its advantage as an offshore bank.

It would also mitigate risk in working with small and medium enterprise clients in China by attracting them via wealth management products, he said.