OCBC Q1 net profit slips 14% on lower insurance, increase in allowances

OVERSEA-Chinese Banking Corporation (OCBC Bank) reported on Friday that a net profit of S$856 million for the first quarter of 2016 (1Q16), a fall of 14 per cent from S$993 million a year ago as growth in net interest income and higher associates' contribution were offset by lower insurance income and increased allowances.

Operating earnings from banking operations, however, were up 3 per cent, underpinned by higher net interest income and disciplined cost management.

"Given the weak economic environment and further stresses noted especially in the oil & gas support services sector, we continued to adopt a conservative approach and this was reflected in the increased level of provisions set aside for the quarter,'' OCBC's chief executive officer Samuel Tsien said.

He said the financial market volatility in the first quarter resulted in unrealised mark-to-market losses in the investment portfolio of the group's insurance arm, Great Eastern Holdings. These in turn impacted its reported earnings, despite the strong underlying business growth evidenced by an increase in total weighted new sales.

GEH's contribution to the group's core net profit was S$73 million in 1Q16, down from S$181 million in 1Q15 and S$180 million in 4Q15. Excluding GEH, net profit from banking operations was flat against the prior quarter.

OCBC's net interest income grew 5 per cent to S$1.31 billion from S$1.25 billion a year ago. On March 31, 2016, customer loans grew 1 per cent in constant currency terms, driven by growth in corporate and consumer loans which more than offset a decline in trade-related loans. Net interest margin climbed 13 basis points to 1.75 per cent from 1.62 per cent in 1Q15, largely driven by improved customer loan yields in Singapore and Indonesia.

Non-interest income decreased 12 per cent to S$753 million from S$859 million from a year ago. Fee and commission income fell 5 per cent to S$374 million, mainly from lower wealth management, trade-related and investment banking fees. The increase in income from private banking was more than offset by lower fees and commissions from other wealth management activities as a result of weak investment appetite of customers during the first half of the quarter.

Overall 1Q16 wealth management income, comprising income from insurance, private banking, asset management, stockbroking and other wealth management products, was down 17 per cent to S$482 million, from S$583 million a year ago.

Non-performing loans (NPL) increased from a year ago, reflecting weakening economic conditions and the significant decline in commodity prices which particularly contributed to the stress in the oil and gas support services portfolio. On March 31, 2016, the absolute amount of NPLs was S$2.15 billion, up from S$1.97 billion in the prior quarter and S$1.35 billion a year ago. Most of the year-on-year increase in NPLs was from the downgrades of a number of large corporate accounts in the oil and gas support services sector which required their loan repayment terms to be restructured. The overall NPL ratio was 1.0 per cent, as compared with 0.9 per cent of the previous quarter and 0.6 per cent in 1Q15.

The group's Common Equity Tier 1 capital adequacy ratio (CAR), Tier 1 CAR and Total CAR on March 31, 2016, were 14.6 per cent, 15.1 per cent and 17.3 per cent, respectively.

Looking ahead, Mr Tsien said near term economic visibility "continues to be low".

"We will remain focused on conservative growth in our core businesses and markets, while supporting our customers and staying vigilant in the midst of the current uncertain macroeconomic outlook."