OCBC geared for 'very strong' Greater Bay Area competition; Q1 profit more than doubles to record

OCBC O39 : O39 0% is ready to fend against “very strong competition” coming up in the Greater Bay Area, and is open to M&A opportunities that may emerge from the Citi sale, said its top executive. 

The comments come as the bank on Friday posted a record net profit for the first quarter that more than doubled from its year-ago quarter. OCBC joined its Singapore peers in hitting a new high in fee income while making a far smaller allowance compared with the year-ago period.

Net profit for the first three months ended March 31, 2021 stood at S$1.5 billion, more than doubling S$698 million in the year-ago period.

OCBC’s Q1 earnings beat the S$1.08 billion estimates by Refinitiv.

Over the same period, UOB's U11 earnings rose 18 per cent S$1.01 billion, while DBS D05 : D05 0%posted a 72 per cent jump in net profit to crack the S$2-billion mark.

Asked how she sees competition shaping up in the Greater Bay Area, especially with local peer DBS’s recent acquisition of a substantial stake in Shenzhen Rural Commercial Bank in its move to double down in the region, OCBC chief executive Helen Wong said she expects “very strong competition”.

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But she added that the bank is well-positioned to capture a piece of the growing market. "Very strong competition I’d expect, but indeed, the market is so big that the pie is big enough for everybody to do reasonable business,” said Ms Wong at her first media briefing as CEO.

Ms Wong also said in positioning itself for future growth, the banking group will capitalise on the flow of capital, trade and investments across Greater China and Asean. There are plans as well to expand its wealth management franchise, and continue investments into sustainability and digitalisation.

With about 80 branches in the region and established partnerships with local financial institutions, OCBC has seen strong interest in Chinese customers looking to invest outside their country. China’s opening up of its capital markets will spur inbound investments as well, she said.

OCBC’s loans grew 1 per cent to S$271 billion from the previous quarter, driven mainly by customers in China and the United Kingdom.

On the bank’s interest in consumer banking assets that Citi is putting up for sale in Asia Pacific, Ms Wong said the group remains “open” without mentioning specific markets. 

“On Citi, I just want to say we are always open to opportunities in markets that we have operations in," she said in the virtual briefing. "So we'll stay open on this particular opportunity that (has) arisen."

The Wall Street giant announced in April that it would shed most of its consumer banking operations in Asia outside of Singapore and Hong Kong, citing the lack of scale needed to compete in those markets as well as broader plans to scale up on wealth management. All three Singapore banks are set to review Citi's Asia-Pacific assets that are up for sale.

Citi analyst Robert Kong said management "remained elusive" on how it would manage down its sector-leading CET1 ratio of 15.5 per cent, without committing to a precise payout ratio or dividend level. "OCBC is also open to evaluating inorganic opportunities in its core markets, which suggests the high capital level may weigh on ROE in the near term."

OCBC’s total allowances for the first quarter stood at S$161 million, down 75 per cent from the year-ago period. Roughly half of the allowances for impaired assets were set aside for the remaining oil and gas exposure on its books.

Chief financial officer Darren Tan said the bank has no intention to write back provisions “until the outlook becomes clearer”. 

This stance is similar to UOB, but differs from DBS, which made a general allowance write-back of S$190 million in its first quarter results.

Ms Wong said the bank has seen “healthy repayment trends” following the expiration of Covid-19 relief measures and that she does not expect a huge provision size for the next three quarters. 

OCBC maintains its guidance for allowances, at 100-130 basis points for two years, but believes it will be “on the low side”, she added.

The bank’s non-interest income in the first quarter surged 70 per cent from the year-ago quarter to S$1.47 billion.

Fees and commissions rose 7 per cent to S$585 million. Profits from life insurance went up almost four times to S$422 million, compared with S$106 million from the year-ago period. Trading income rose several times to S$316 million from S$18 million in the year-ago period.

Net interest income for the quarter fell 11 per cent from the year-ago quarter to S$1.44 billion.

Net interest margin stood at 1.56 per cent, unchanged from the prior quarter, and lower than the 1.76 per cent posted in the first quarter of 2020.

The bank's non-performing loans ratio was stable - unchanged compared to the prior quarter and the year-ago quarter - at 1.5 per cent.

Ms Wong said: “I see first quarter performance as exceptional. I think this is due to market conditions. We have had very strong earnings across key markets and businesses. And indeed, we also see diversified earnings that rests on strength and resilience on the three pillars of our businesses, which are wealth, insurance, and of course, banking operations.”

Economic recovery is expected to be strong in OCBC’s core markets of Singapore, Malaysia, Indonesia and Greater China, but recovery is not broad-based yet. 

“This is very much due to emerging variants of Covid-19 and also, slow roll-out of vaccination in certain countries. So, a true return to normal, I guess, will take time and perhaps longer than we think in this year,” she said.

On plans to trim its branch network, Ms Wong said while there will be a reduction of space across the group, there are no plans to cut real estate in Singapore as yet, noting that the bank owns all the buildings it occupies here. She highlighted the need to “optimise” space usage, taking into account decreasing footfall while ensuring ample space to ensure that staff can work safely and effectively from the office.

OCBC has reduced about 10 per cent of its branches across the group in the last three to five years, she said, noting that the bulk of the trimming last year happened in Indonesia.

Shares of OCBC closed S$12.56 on Friday, up 1.29 per cent or 16 Singapore cents.

READ MORE: 

• Earnings wrap: Singapore banks make handsome beat on estimates in Q1

• Singapore banks may shop for buys as fears over bad debts recede