Published February 19, 2009

OCBC's Q4 profit falls 30% to $301m

Provisions, fee slump hurt earnings but interest income rises sharply

By CONRAD TAN

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OCBC Bank's net profit fell 30 per cent to $301 million in the fourth quarter compared to a year earlier, a bigger drop than analysts had expected, as fee income slumped and the group set aside much higher allowances for bad loans.

'The bank is seeing only modest stress in its corporate-loans portfolio, and its consumer loans are not showing much stress at all.' - Mr Conner

Sharply lower profits from its insurance subsidiary Great Eastern Holdings also dragged down the group's earnings for the quarter.

But the group's net interest income grew strongly in the fourth quarter, rising 28 per cent from a year earlier to $783 million, as OCBC benefited from a wider gap between the interest that it earned on loans and the cost of funding those loans. Compared to the previous quarter, net interest income grew 15 per cent.

The group's net interest margin (annualised) widened to 2.47 per cent from 2.14 per cent a year earlier and 2.18 per cent in the third quarter.

That made its lending activities far more profitable, though its net customer loans - which include deductions of allowances for bad loans - actually dipped by 0.1 per cent over the quarter to $79.8 billion at the end of December.

'The margins improved much more than I expected - they've been managing the spreads quite well,' said Pauline Lee, an analyst at Kim Eng Securities.

Still, 'I do not think that it's sustainable in the low interest rate environment', she added. 'The outlook for the net interest income will start to turn.'

Allowances for bad loans and other assets rose sharply to $243 million from just $13 million a year earlier and $156 million in the third quarter of 2008.

'The results were below expectations,' said CIMB analyst Kenneth Ng. 'The market was already expecting a slowdown in fees and a pick-up in provisions, but the rise in provisions was especially significant.'

Chief executive David Conner said that the higher impairment allowances were 'an indication that we're heading into very difficult times'.

But he added that the bank was seeing only 'modest stress' in its corporate-loans portfolio, and that its consumer loans are 'not showing much stress at all'.

The proportion of non-performing loans actually fell from 1.7 per cent a year earlier to 1.5 per cent in the fourth quarter, though it was up slightly from the 1.3 per cent in the previous quarter.

Compared to the third quarter, OCBC's net profit for the three months to end-December slid 25 per cent. For the full year, the group's net profit was down 16 per cent, at $1.75 billion.

It was the second bank here to fall short of analysts' estimates. Analysts surveyed by Reuters had forecast an average of $381 million in Q4 net profit for OCBC, while those polled by Bloomberg had expected $357 million.

Rival DBS Group said last Friday that its fourth-quarter net profit fell 40 per cent from a year earlier to just $295 million as fee income suffered and charges for bad loans rose sharply.

OCBC's share price ended 0.2 per cent lower yesterday at $4.89, after sliding as much as 1.8 per cent earlier.

Its Q4 non-interest income dived 44 per cent from a year earlier to $259 million as fees and commissions from wealth management and brokerage services slumped badly and the bank suffered trading losses amid the turbulent markets towards the end of last year.

'There was a broad-based decline in fees, not just the capital markets related part,' said CIMB's Mr Ng.

The group declared a final dividend of 14 cents a share for 2008, taking the total dividend for the year to 28 cents, unchanged from 2007.

It also plans to revive its scrip dividend scheme, started in 1996, to give shareholders the option of receiving the latest dividend in the form of shares instead of cash - which would conserve capital for the bank.

Shareholders who choose to be paid their dividend in shares can expect to receive the shares at a discount of about 10 per cent to the market price.

Excluding divestment gains and tax write-backs, OCBC's annualised 'core' earnings per share - or what the group would have earned for the whole year if its earnings continued at the same pace - fell to 30.1 cents, from 48.8 cents in the third quarter and 53.3 cents a year earlier.

'Things continue to look gloomy, especially for the fee-based income,' said Kim Eng's Ms Lee. 'The bulk of it is very dependent on market-related activity which has mostly dried up.'