OCBC's Q3 profit up 19%, debt holidays rise in Malaysia

OCBC's loans under moratorium in Malaysia have crept up steadily in the third quarter, with new non-performing assets (NPAs) also up from the downgrades of secured consumer loans there.

Despite the shaky recovery outlook in Malaysia, the lender remains "comfortable" that sufficient provisions have been set aside to buffer for any unanticipated stress in the loan book, said OCBC chief Helen Wong at the bank's results briefing on Wednesday (Nov 3).

On a quarterly basis, relief loans in Malaysia rose from S$1.5 billion to S$4 billion for the three months ended Sept 30, accounting for a fifth of the bank's Malaysia loan book. This comes amid a six-month blanket moratorium until early 2022, announced by the Malaysian government in June.

Total NPAs were 4 per cent higher at S$4.24 billion than a quarter ago, largely due to a rise in new NPA formation of S$804 million which more than offset higher recoveries, upgrades and write-offs.

"The quarter on quarter increase was largely from the downgrades of secured consumer loans in Malaysia and a couple of corporate accounts in Indonesia, said OCBC chief financial officer Darren Tan.

As at end-September, total loans under moratorium stood at S$6.3 billion or 2 per cent of group loans, higher than S$4.5 billion a quarter ago.

But this is significantly lower than the 10 per cent seen a year ago, said Wong. About 89 per cent of the relief loans are secured.

Net profit rose 19 per cent to S$1.22 billion, compared with S$1.03 billion in the year-ago period, on resilient business growth and lower allowances as the credit outlook continued to improve.

The earnings beat the average estimate of S$936 million by 4 analysts, according to data from Refinitiv.

Annualised earnings per share stood at S$1.07 for the quarter, up 17 per cent from S$0.92 a year ago.

Non-performing loan ratio was stable at 1.5 per cent while allowance coverage against total NPAs stood at 97 per cent. Total credit costs were lower at 21 basis points (bps), compared to 47 bps a year ago.

"If the credit environment remains stable, we do expect credit costs to be at the lower end of our guidance of 100-130 bps over two years," said Wong.

Net interest income for the quarter rose 3 per cent to S$1.46 billion, underpinned by a 4 per cent increase in average loan volume but partly offset by a decline in net interest margin (NIM) - down 2 bps to 1.52 per cent, from 1.54 per cent from a year ago.

Tan attributed the lower NIM to a 1-2 bps drop from the impact of interest reversals from the downgrade of Malaysia and Indonesia loans to non-performing, as well as stronger competition among banks to lend to good-quality companies given the excess liquidity.

In a report, Maybank Kim Eng noted that OCBC's quarter-on-quarter NIM decline was sharper than expected. That said, loan growth and and asset yields should improve in 2022, with rising rates and demand from small and medium-sized enterprises.

Total allowances fell 54 per cent to S$163 million for the quarter; the bank had set aside allowances for impaired assets of S$185 million for corporate and consumer accounts in Malaysia and Indonesia.

Looking ahead, Wong expects a 3-6 per cent gross domestic product growth for the bank's key markets in 2022 as vaccination rates pick up and economies gradually reopen.

Wealth management is a major growth engine over the next few years as the group continues to beef up its investments, strategic partnerships and manpower, particularly in the Greater China region, with plans to double the number of relationship managers servicing Chinese clients to 500 by 2023.

Its Hong Kong subsidiary, OCBC Wing Hang Bank, recently partnered with China's Ping An Bank to provide two-way wealth-management services in the Greater Bay Area.

Wealth management income in Q3, at S$897 million, was driven by continued inflows of net new money and positive market valuations, while private banking assets under management grew 6 per cent year on year to US$123 billion.

"One strong advantage we have is that we're able to serve our high net worth clients not just in their own investments and family needs, but help with the business they own as well. There's a lot of cross referencing... working together between our wholesale bank in the OCBC group with relationship managers in Bank of Singapore," said Wong.

Capturing more trade and investment flows in the Asean-Greater China corridor is another priority for the group, such as by helping Greater China clients expand into Asean by providing cross-border support for their trade and cash management needs.

As the world grapples with climate change and the impact of carbon transition, Wong stressed that sustainability is a megatrend that is no longer optional.

OCBC's sustainable finance commitments have surpassed its initial target of S$25 billion by 2025, with plans to set a "new and ambitious" target in due course.

Earlier this year, Citi announced it was exiting 13 consumer markets mostly across Asia, citing the lack of scale needed to compete and a greater focus on wealth management. The Business Times understands that OCBC has exited from the deal.

Non-interest income in Q3 was down 2 per cent to S$1.1 billion year on year.

Total net fees and commissions rose 14 per cent to S$569 million amid broad-based fee growth associated with the rise in customer transactions and business activities.

Profit from life insurance also rose 22 per cent to S$262 million, while total weighted new sales and new business embedded value grew strongly by 29 per cent and 3 per cent, respectively.

Net trading income was lower at S$83 million as compared to S$255 million in the year-ago period, largely attributable to unrealised mark-to-market losses in Great Eastern Holdings' investment portfolio, while customer flow treasury income of S$164 million was slightly below S$173 million a year ago.

"Overall, a good result and puts OCBC in a position to raise loan growth and NIM momentum in 2022. Potential for write-backs are on the upside in our view," said Maybank Kim Eng.

"We remain positive on the long-term outlook but are watchful of the near-term headwinds from the pandemic. Together with our strong business franchise and established global network, we are well positioned to tap on the rising opportunities in the region to drive sustained long-term growth for the group," said Wong.

Shares of OCBC closed on Wednesday at S$11.87, down 9 cents.

READ MORE: OCBC betting on China's wealth market as Q2 net profit rises 59%