OCBC misses Q4 expectations as bad debt allowances double

Singapore

WITH a doubled provision for bad debts in the fourth quarter, the latest financial results of Oversea-Chinese Banking Corporation (OCBC) played a similar tune to that of its competitor DBS in signalling caution over souring loans.

This comes even as OCBC - like DBS - noted no systemic weakness in loans linked to the commodities and the oil-and-gas sectors, which have been bruised by falling prices.

OCBC on Wednesday reported an 11 per cent lift in net profit for the fourth quarter that missed expectations of analysts polled by both Reuters and Bloomberg. Shares of OCBC - which announced results before trading - closed unchanged at S$10.60.

Net profit for the three months ended Dec 31, 2014, stood at S$791 million, up from S$715 million the same period a year ago. This is below average forecasts of S$862 million and S$883 million reported by Reuters and Bloomberg.

Earnings per share stood at 19.2 Singapore cents - based on a larger share base following a rights issue - compared to 19.5 Singapore cents a year ago. OCBC will pay a final dividend of S$0.18 per share, up from S$0.17.

Net interest income rose 24 per cent to S$1.28 billion, with net interest margin - a measure of lending profitability - gaining three basis points to 1.67 per cent. Non-interest income was also up 12 per cent at S$762 million, reflecting stronger contributions from its insurance arm Great Eastern Holdings, as well as higher fee and trading income.

These would include gains from Wing Hang Bank, which OCBC has been consolidating into its numbers since the third quarter.

But OCBC registered a 29 per cent increase in operating expenses to S$922 million that reflected greater costs from Wing Hang. It also more than doubled its allowances for loans in the fourth quarter to S$154 million, from S$68 million a year ago.

OCBC said it made allowances that represented nearly 540 per cent of unsecured non-performing assets (NPAs) - the highest coverage ever for the bank, said CEO Samuel Tsien at a press briefing on Wednesday. Its also translated to about 170 per cent of total NPAs and, all in, reflects the view that "the credit environment is going to be tougher than what we have seen in the past", Mr Tsien said.

This deduction against banks' operating profit is effectively a pre-emptive cushion created by banks against loans that might default later. If banks prove to be too conservative, they can do a write-back later.

The large boost in allowances mainly related to the specific provisions against a Malaysian steel company, and for a transport firm in Singapore, said Mr Tsien. Allowances for loans out of Wing Hang and general unsecured lending also contributed to the larger provision.

Still, OCBC's non-performing loans as a proportion to all loans inched down to 0.6 per cent from 0.7 per cent a year ago. The improvement is also true for DBS. Mr Tsien revealed that loans related to the oil-and-gas segment made up less than 7 per cent of the total loans outstanding. That translated to S$14.7 billion in loans, of the total of about S$210 billion.

Commodity-related loans represented under 5 per cent of the total loans, he added. "Both of these portfolios have been performing very well," Mr Tsien said, noting that the bank has been more cautious in its client selection for these sectors.

Mr Tsien said with Wing Hang, he expects the Greater China profit contribution - which now stands at 12 per cent - to be closer to Malaysia's near-20 per cent in time. Malaysia is OCBC's second-largest market.

While Singapore's profit contribution - now at nearly 60 per cent - should decrease as part of the enlarged pie, it should not go under half, he added.

For the full year, OCBC's net profit rose 39 per cent to S$3.84 billion. This included a one-off gain of S$391 million related to the group's increased ownership in Bank of Ningbo.

Banks here should gain from the recent spike in short-term rates, if it is sustained. Eighty per cent of OCBC's loans are pegged to floating rates, of which half use Sibor or SOR, said its chief financial officer Darren Tan.