OCBC Q3 provisions jump on weaker economic outlook

Singapore

OCBC Bank recorded a surge in its third-quarter allowance for loans and other assets from both a quarter ago and from the year-ago period, as Singapore's second-largest lender anticipates a weaker economic outlook and rising geopolitical risks across most of its markets including Singapore, Hong Kong and Indonesia.

This move to add more provisions is a "prudent" one that reflects an operating environment that is "visibly weaker and undeniably slower than before", said OCBC CEO Samuel Tsien at the bank's third-quarter results media briefing on Tuesday.

In its third quarter, OCBC Bank's net profit dipped 6 per cent to S$1.17 billion after booking a one-off charge of S$91 million at its Indonesian banking unit due to a refinement in the expected credit loss (ECL) modelling approach.

Excluding the one-time charge, the group's core net profit was S$1.26 billion, just a notch higher than S$1.25 billion a year earlier.

Allowances for loans and other assets charged for the third quarter were S$179 million, up from S$111 million in the second quarter. This is also significantly higher than the S$49 million recorded a year ago. The $179 million figure excludes the S$91 million one-off charge - after accounting for tax and non-controlling interest - that was taken at its Indonesian banking unit.

OCBC saw a slight uptick in its non-performing loans ratio, which went up to 1.6 per cent as at Sept 30, 2019 from 1.5 per cent a quarter ago. Total non-performing assets came in at S$4.19 billion, above S$3.91 billion in the previous quarter, mainly due to the downgrade of two corporate accounts, one in the offshore support vessels and services (OSV) sector and the other in the transportation sector.

Additional allowances for non-impaired loans were made from updates of the macro-economic variables in the ECL model, while the bank took a "more aggressive approach" towards downgrading some of the loans to ECL stage three, or allowances for impaired assets. OCBC also upped its regulatory loss allowance reserve.

Mr Tsien noted: "That has, as a result, created additional provisions on our books for the third quarter, but we believe that is the right thing to do."

This also takes into account the situation in Hong Kong, where there is "no indication that there are stresses yet" and no "noticeable deterioration in portfolio quality", he said. He noted that the Greater China NPL ratio continues to be "very low" at 0.4 per cent.

"We believe that the impact will be more on growth of the Hong Kong market in the near term, rather than a significant and noticeable deterioration in the portfolio quality in the near term," he explained.

Mr Tsien said that the medium-term outlook for Hong Kong remains positive, in the event that the unrest subsides and there are effective government policies to prop up economic activities.

Greater China, which includes Hong Kong, is the second-largest market for OCBC after Singapore, accounting for about 24 per cent of loans.

Despite the cautious outlook, OCBC's third-quarter results were largely in line with analyst expectations.

Total income for the quarter rose 4 per cent to S$2.66 billion from S$2.54 billion a year ago.

Net interest income for the quarter grew 6 per cent to S$1.60 billion from S$1.51 billion. This came on the back of a five-basis point increase in net interest margin (NIM) to 1.77 per cent from improved asset yields, but it was down two basis points from a quarter ago.

Meanwhile, non-interest income for Q3 was up two per cent to S$1.06 billion from a year ago.

This comes as net fees and commissions grew 10 per cent to a new record of S$550 million, driven by wealth management as the private banking business continued to attract net new money inflows.

No dividend has been declared for third quarter as the bank pays dividends on a semi-annual basis.

Mr Tsien expects the NIM for 2019 to be "meaningfully higher" than 2018's 1.70 per cent, but this will gradually come down in 2020 in line with lower interest rates. Loan growth is targeted at low single digits of about 2-3 per cent for 2019 and 2020, on the back of the global slowdown.

During the briefing, Mr Tsien declined to comment on OCBC's plans for the upcoming digital banking licences but noted that there are certain segments in Singapore's economy which are under-served, giving an opportunity for banks to look at a new model to approach the market.

If the model is proven successful, it could be a good platform to expand to other countries outside Singapore, he noted.

The Business Times reported on Monday that OCBC is in firm talks with Keppel Corporation, peer-to-peer lender Validus Capital, and venture capital fund Vertex Ventures to form a digital bank consortium to vie for one of the three wholesale digital banking licences up for grabs.

The bank's shares closed on Tuesday up one Singapore cent, or 0.09 per cent, to S$11.08.