OCBC's Q1 profit sinks 43% on lower insurance contributions, surge in provisions

OCBC's group chief executive officer Samuel Tsien expects cumulative credit costs to be between 100 and 130 basis points (bps) over the next two years - higher than during the global financial crisis (GFC) and close to the Sars period.

The extent of economic fallout from the Covid-19 pandemic remains "very uncertain", with a strong recovery unlikely until 2021 at the earliest, he said during a media briefing on its first quarter results.

During the GFC in 2008-2009, OCBC's credit costs was 110 bps, while during the Sars period in 2002-2003, credit costs went up to 143 bps.

Singapore's second-largest lender expects the non-performing loans (NPL) ratio to be between 2.5 and 3.5 per cent, taking into account the projected effect of government relief measures.

As it is, its NPL ratio went up two basis points to 1.52 per cent in Q1 compared to a year ago, and up seven basis points from last quarter.

On Friday, OCBC reported a 43 per cent dive in net profit to S$698 million for its first quarter, dragged down by non-operating losses in its insurance unit and a surge in provisions due to its oil and gas exposure and the deteriorating macroeconomic environment from the Covid-19 pandemic.

This was weaker than an average estimate of S$941 million from four analysts, according to Refinitiv data.

Total allowances went up from S$249 million to S$657 million for Q1 compared to a year ago. This consists of specific allowances of S$275 million, largely made for a "Singapore based corporate customer in the oil trading sector".

It has been widely reported that Singapore's oil trading giant Hin Leong has collapsed amid a pile of debt. Singapore banks have a total exposure of about US$600 million to Hin Leong, with OCBC's exposure reported at around US$220 million.

During the briefing, Mr Tsien said that OCBC's oil and gas (O&G) sector comprises of 5 per cent of its loan book, while the commodities sector makes up 6 per cent.

Despite the woes in the O&G sector, Mr Tsien said that the bank does not intend to reduce its exposure "just because oil prices are going down". He added that OCBC's exposure to the sector is "not significant" and will evaluate on a case-by-case basis.

Within its O&G portfolio, offshore support vessels makes up 35 per cent, traders makes up 25 per cent, upstream players makes up 25 per cent, and others including retail makes up the rest.

Without naming names, Mr Tsien noted that there have been certain allegations of irregular activities in certain companies, but he believes that these are isolated cases.

"Most traders are operating on a normal trading basis," he said. "We do not believe that what is seen in isolated cases is a prevailing practice in this sector."

Following the collapse of Hin Leong, another commodities trading company ZenRock was alleged to be involved in a series of "highly dishonest transactions".

Aside from specific provisions, general allowances also soared to S$382 million in Q1 from S$17 million previously, which includes forward-looking macroeconomic variable adjustments to buffer for stresses expected against the recessionary market outlook.

Even with allowances stripped out, OCBC group's operating profit still fell 12 per cent to S$1.55 billion as insurance contributions dived 94 per cent due to unrealised mark-to-market losses.

The group's net interest income went up 6 per cent to S$1.63 billion from a year ago, driven by a growth in customer loans.

Net interest margin (NIM) remained at 1.76 per cent from a year ago. NIM is a key gauge of profitability for banks, measuring the difference between income earned from loans and the interest paid to depositors.

Mr Tsien said during the media briefing that he expects NIM compression in subsequent quarters from full effect of Fed rate cuts.

In Q1, the group's non-interest income fell 24 per cent to S$864 million, weighed down by lower net trading income which fell almost S$300 million to S$18 million from a year ago, on the back of unrealised mark-to-market losses in Great Eastern's investment portfolio.

OCBC's common equity tier one (CET1) ratio fell to 14.3 per cent, down from 14.9 per cent a quarter ago.

The CET1 ratio is a signal of banks' capital strength, and measures lenders' core equity capital against their risk-weighted assets.

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

On Friday, OCBC's chief financial officer Darren Tan said that there will be no change to the bank's dividend policy. It will review its dividend policy closer to the half-year and full-year mark, he added.

Last quarter, the bank had said that it will maintain a "progressive and sustainable" dividend policy that grows in tandem with its long-term growth.

In line with revenue expectations for the year, Mr Tsien said that cost management will be further tightened. However, he reiterated that there is no plan on retrenchment amid this outbreak.

In his outlook, he projects that the next few quarters will be "very difficult for individuals and businesses" due to the impact of Covid-19.

The bank expects to extend moratorium relief and government-assisted loans of S$42 billion to over 165,000 individuals, small and medium-sized enterprises and corporate customers across Singapore, Malaysia, Hong Kong, Macau and Indonesia.

In Singapore, some S$4 billion of loan moratorium to individuals have been approved to date, mostly for home loans.