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OCBC posts 12% drop in 3Q earnings to $1.03 bil on larger allowances, higher than consensus' estimates

Felicia Tan
Felicia Tan • 4 min read
OCBC posts 12% drop in 3Q earnings to $1.03 bil on larger allowances, higher than consensus' estimates
The results surpassed expectations of analysts’ estimates compiled by Bloomberg, which stood at $787 million.
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Oversea-Chinese Banking Corporation (OCBC Bank) has reported earnings of $1.03 billion for the 3QFY2020 ended September, some 12% lower than the $1.17 billion a year ago, largely driven by larger allowances.

The results surpassed expectations of analysts’ estimates compiled by Bloomberg, which stood at $787 million.

Q-o-q, 3QFY2020 net profit was up some 41% from the $730 million posted previously.

Earnings for the 9MFY2020 stood at $2.46 billion, down 32% from the $3.63 billion reported in the same period the year before.

Net interest income for the 3QFY2020 fell 11% y-o-y and 4% q-o-q to $1.42 billion as the group’s net interest margin (NIM) fell 23 basis points y-o-y amid a sustained low interest rate environment.

The quarterly dip was a result of lower market rates, driven by a contraction of 6 basis points in NIM.

See also: Cordlife posts net loss of $11.57 mil for 1QFY2024 due to refund fulfilment

Non-interest income rose 6% y-o-y led by higher income trading profit but fell 2% q-o-q to $1.12 billion on a 21% q-o-q decline in trading income.

Net fee income for the quarter was up 13.9% q-o-q to $501 million from broad-based fee growth, which benefitted from a pick-up in customer activities following the phased re-opening of the economy. The growth was mainly driven by growth in wealth management and brokerage fees, which went above 2019 levels.

Y-o-y, net fee income was down 8.9% from the $550 million reported in 3QFY2019.

See also: Changi Airport Group reports FY2024 earnings of $431 mil, 13.1 times higher y-o-y

3QFY2020 trading income came in at $255 million, down 21% q-o-q mainly due to a decline from treasury income and lower mark-to-market gains in its insurance subsidiary Great Eastern Holdings’ (GEH) investment portfolio.

Y-o-y, trading income for the quarter registered a 40.1% surge, surpassing levels in 2019, due to higher customer flow income.

Total wealth management income rose 7% y-o-y and 3% q-o-q to $938 million, making this the highest quarter reported for the bank since 2018.

Wealth management fees matched the pre-Covid-19 levels of the year before, rising 4% y-o-y and 24% q-o-q to $252 million.

As at Sept 30, 2020, assets under management (AUM) at the bank’s private banking subsidiary Bank of Singapore (BoS) grew 5% y-o-y and 3% q-o-q to US$116 billion ($159 billion) underpinned by net new money inflows and better market valuations.

GEH’s total weighted new sales (TWNS) rose 36% y-o-y and 51% q-o-q to $432.8 million while new business embedded value (NBEV) was up 2% y-o-y and 47% q-o-q to $160.2 million. Profit contribution from GEH to the group stood at $241 million compared to the $250 million in the previous quarter.

See: Great Eastern Holdings' 3Q earnings rise 40% to $287.9 mil on higher valuation of investments and improved market conditions

For more stories about where money flows, click here for Capital Section

Operating expenses fell 3% y-o-y and 1% q-o-q to $1.1 billion due to tighter control in staff compensation and other discretionary expenses.

The cost-to-income ratio (CIR) for the quarter stood at 43.2%, compared to the 42.2% in 2QFY2020.

The group’s non-performing loan (NPL) ratio was stable at 1.6% y-o-y and q-o-q.

As at Sept 30, 2020, OCBC has some $350 million in allowances set aside 53% lower q-o-q. The allowances comprise $148 million in allowances for impaired loans, $202 million in allowances for non-impaired assets including a $150 million management overlay above the ECL model requirements.

Year-to-date, a total of $450 million in management overlay has been set aside to account for the uncertain economic outlook.

Total cumulative allowances stood at $4.62 billion as at Sept 30, 2020 from the $3.26 billion a year ago and the $4.38 billion logged in the previous quarter.

The group’s common equity tier 1 (CET1) ratio stood at 14.4% as at Sept 30, 2020, up from the 14.2% in 2QFY2020.

Leverage ratio for the 3QFY2020 stood at 7.6%, up from the 7.4% in the previous quarter.

The CET1 and leverage ratios were all above their regulatory requirements.

Group CEO Samuel Tsien says the group may not have seen the “full extent” of the lagging economic impact of the crisis yet despite the better-looking numbers q-o-q.

“With the outlook still uncertain, it is most important that we continue to strengthen our capital and balance sheet. This will position us well for the crisis and enable us to emerge well-prepared for new opportunities when the market recovers,” he says.

“We have set aside prudent levels of allowances including management overlays on top of the ECL model requirements on a forward-looking basis. We will stay vigilant in managing the credit portfolio and are working closely with our customers to ensure a smooth and disciplined transition out of the moratorium programmes.”

“While cost has been tightly managed, the Group will continue to invest in digital transformation to boost customer engagement, increase productivity and achieve greater cost efficiencies,” he adds.

Shares in OCBC closed 6 cents higher or 0.7% up at $8.63 on Nov 4.

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