Published May 7, 2009

BANK EARNINGS
OCBC beats forecasts with Q1 net profit of $545m

12% profit fall lower than expected but CEO stays cautious

By CONRAD TAN
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OCBC Bank's net profit fell 12 per cent to $545 million in the first quarter compared to a year earlier, a smaller drop than analysts had expected, as the group received a one-time boost to its net profit of $175 million from insurance subsidiary Great Eastern Holdings.

Rosier: Compared to the preceding fourth quarter, OCBC's Q1 net profit rose 81%.

OCBC also benefited from higher net interest income from its main lending business, trading gains, and a reduction in operating expenses.

Compared to the preceding fourth quarter, OCBC's net profit for the three months to end-March rose 81 per cent.

But chief executive David Conner warned that 'the economic outlook remains difficult and uncertain'.

'I think it's going to be a fairly long and slow climb out of the situation that we're in,' he told reporters at a media briefing.

OCBC's share price closed 4.6 per cent higher at $6.80 yesterday, after surging as much as 7.5 per cent after the results were announced at lunchtime.

Analysts surveyed by Reuters had forecast an average of $293 million in Q1 net profit for OCBC, while those polled by Bloomberg had expected $297 million.

Royal Bank of Scotland analyst Trevor Kalcic said in a note that it was a 'very solid set of numbers'.

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 - rose to 68.4 cents, from 30.1 cents in the preceding quarter and 58.7 cents a year earlier.

The bank took a $197 million charge for bad loans and other assets for the quarter, compared to a net writeback of $8 million a year earlier and allowances of $243 million in the fourth quarter of 2008.

The $197 million in allowances included a $94 million write-down on the remaining value of its investments in collateralised debt obligations or CDOs.

The proportion of non-performing loans (NPLs) rose slightly to 1.8 per cent, from 1.6 per cent a year earlier and 1.5 per cent in the fourth quarter.

Total NPLs rose 20 per cent over the first three months of the year to $1.42 billion at March 31. Most of the increase was from OCBC's businesses in Greater China, Indonesia and Malaysia. The new NPLs comprised mainly loans to the manufacturing, building and construction, and general commerce sectors, OCBC said.

Mr Conner said that he expected the proportion of NPLs to rise as the recession drags on. 'Things are likely to get worse before they get better.'

But he added that OCBC's overall loan portfolio was still performing well: 'We don't see any nasty trends that are likely to lead to very substantial provisioning at this stage.'

Its net customer loans - which include deductions of allowances for bad loans - fell 1.2 per cent over the quarter to $78.8 billion at the end of March, though the figure was still 6.5 per cent higher than the $74 billion a year earlier.

'Loan growth is probably going to be soft' for the rest of the year - 'mid single-digits at best', Mr Conner said.

Net interest income rose 16 per cent from a year earlier to $740 million, as the group benefitted 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 fell 6 per cent, as interest margins narrowed slightly.

Non-interest income, excluding divestment gains, grew 61 per cent from a year earlier to $607 million, including a one-time gain of $201 million from Great Eastern's business in Malaysia.

Malaysia's plan to open up its financial services sector further to foreign players also introduces new opportunities for OCBC and its subsidiaries there, Mr Conner said. Great Eastern plans to apply for a takaful or Islamic insurance licence in Malaysia, while OCBC is keen to add to the 29 bank branches it already has there, he added.