Published November 6, 2008

OCBC's Q3 profit falls 13% to $402m

Bank maintaining strong capital position, warns of rough times ahead

By SIOW LI SEN
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OCBC Bank yesterday posted a 13 per cent drop in third-quarter net profit to $402 million as provisions or allowances for bad loans surged. Against the second quarter, net profit was down 6 per cent.

Mr Conner: Marina Bay Sands project is quite sound and won't be affected by Las Vegas Sands's problems

The second local bank to post sombre results, it warned of rough times ahead. Chief executive David Conner said that given the current global financial crisis, OCBC is maintaining its strong capital position.

The bank has not done any share buybacks for several quarters and 'frankly we're maintaining our capital; one, in previous quarters, because we've seen significant loan growth and two, now, frankly because it's wise to hang on to the capital given the potential for a difficult period going forward'.

Last week, UOB said that third-quarter 2008 net profit fell 5.1 per cent to $475 million from a year ago on volatile financial markets and higher impairment charges.

DBS will report its earnings tomorrow.

Speaking at a press conference, Mr Conner also said that he did not think that the hammering that OCBC has taken in its stock price will result in it being acquired.

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Click here for OCBC's news release

'The reality is the Lee family have a pretty sizeable controlling position in OCBC and they have said repeatedly it's not for sale,' he said.

OCBC said that annualised earnings per share was down to 48.8 cents from 53.4 cents.

Allowances for the quarter amounted to $156 million, substantially higher than $39 million a year ago and $55 million in 2Q08 as the bank took hits from turmoil in the financial markets.

Mr Conner noted that OCBC has yet to see major loan losses. Non-performing loans ratio improved to 1.3 per cent from 1.4 per cent in June 2008 and 2.1 per cent in September last year.

Asked if banks' NPLs might worsen to what they were during the 1997/98 Asian financial crisis, he noted that when he joined as OCBC chief executive in 2002, the NPL was in the 8 per cent range. 'I don't think we'll go on to 8-9 per cent, I expect we will manage the bank better than that, but then again banks reflect the economies in which they operate. We can't go and turn everybody off in terms of loans, in order just to avoid losses.'

As for OCBC's property exposure, and also its exposure to the integrated resort, Marina Bay Sands, he said that the bank is in good shape.

OCBC's current loan-to-value for the bank's residential loan portfolio is an average 50 per cent.

Its total real estate exposure is way below the 35 per cent limit to overall loans, he said.

Of the property loans committed over the last two years, some are still being drawn down. 'Some later projects are potential concerns . . . we don't see great big problems but again time will tell,' he said.

As for OCBC's exposure to Marina Bay Sands, he said 'the project is quite sound, it won't be contaminated by Las Vegas Sands's problems or Macao's problems'.

Mr Conner added that if Las Vegas Sands, the parent company, does not complete the project - but he thinks it will complete the project - 'new partners will come in'.

The three local banks are lending almost $2.2 billion to Marina Bay Sands. United Overseas Bank (UOB) has committed to lend almost $890 million to the project. DBS Group Holdings's exposure is in the range of $740 million while that of OCBC Bank is around $570 million.

Loans to the building and construction industry made up 20 per cent of OCBC's total lending by the end of September, compared with 12 per cent at UOB. DBS has 13 per cent of its total loans to the industry.

For the quarter under review, OCBC customer loans grew 20 per cent from a year ago and 4 per cent from the previous quarter to $79.9 billion.

The bank also took in more deposits which rose 9 per cent to $108 billion from a year ago. Since mid-September following the collapse of Lehman Brothers, the bank had significantly higher net inflows but that has since tapered off after the government guaranteed deposits.

OCBC's net interest income grew 21 per cent to $684 million helped by improved margins. Net interest margin rose 11 basis points to 2.18 per cent from a year ago but was down from 2.24 in the previous quarter, largely due to lower average yields on investment securities, in particular Singapore government bonds.

Non-interest income fell only 4 per cent to $462 million from a year ago as bigger profits from the bank's insurance unit helped offset declines in stock-broking and wealth management income, as well as losses in dealing of investment securities.

Profit from Great Eastern Holdings' (GEH's) life assurance business increased by 35 per cent year-on-year to $145 million as it benefited from the decline in long term interest rates and higher government bond prices.

But GEH has warned that the financial crisis intensified after mid-September. Impairment provisions may be made over the next few quarters, it said.

OCBC said that expenses rose 15 per cent to $492 million from a year ago and were up 4 per cent from Q2. Group headcount rose 10 per cent to 19,891 from year ago.

OCBC shares ended at $5.28, up 21 cents, while GEH shares ended unchanged at $9.48.