OCBC Q1 profit slumps 43% on lower insurance contributions, surge in provisions

SINGAPORE (THE BUSINESS TIMES) – OCBC’s net profit sank 43 per cent to $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 $941 million from four analysts, according to Refinitiv data.

Total allowances went up from $249 million to $657 million for Q1 compared to a year ago. This consists of specific allowances of $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 U$600 million to Hin Leong, with OCBC’s exposure reported at around U$220 million.

General allowances also soared to $382 million from $17 million previously, which includes forward-looking macroeconomic variable adjustments to buffer for stresses expected against the recessionary market outlook.

Its non-performing loans (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.

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

For its banking operations, net interest income went up 6 per cent to $1.6 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.

Non-interest income went up 11 per cent to $778 million, driven by fee income which was in turn led by wealth management and brokerage income. Net investment gains was also higher year-on-year at $118 million, driven by sale of debt securities.

Net trading income fell almost $300 million to $18 million from a year ago, on the back of unrealised mark-to-market losses in Great Eastern’s investment portfolio.

Insurance income was also down 43 per cent, driven by weak investment performance.

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 its first quarter performance OCBC’s group CEO Samuel Tsien said in a statement that “the overall fundamentals of our diversified banking, wealth management and insurance businesses remain sound”.

He expects the next few quarters to be “very difficult for individuals and businesses” due to the impact of Covid-19.

“We paid close watch on our credit portfolio against the market uncertainty, and significantly shored up our allowances on a forward-looking basis. I am confident that we will continue to maintain a strong balance sheet and achieve sustainable earnings as we execute our long-term corporate strategy of our diversified business model that focuses on the three business pillars,” he added.

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