Published October 29, 2009

NPLs shrink as OCBC beats bleak forecasts

Q3 profit hits $450m outstripping $278m forecast; banks may be turning corner

By EMILYN YAP

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(SINGAPORE) OCBC Bank yesterday trumped expectations to post a third-quarter net profit of $450 million - up 12 per cent from a year ago. The proportion of non- performing loans (NPLs) in the bank's books also fell, providing potential signs of an economy on the mend.

'I hope NPLs have peaked,' OCBC chief executive David Conner said in a briefing. 'We're probably going to see a gradual recovery continue, in which case our NPL ratio and NPL should each trend down slowly.'

Analysts had expected OCBC to rake in a net profit of just $278 million, going by the average of six forecasts from a Reuters poll. The bank's result far exceeded this estimate by 62 per cent.

Earnings were boosted by a sharp fall in provisions, together with strong gains in insurance, trading and investment incomes. OCBC set aside $52 million as allowances for loans and impairment of other assets in Q3. This is 50 per cent less than the $104 million in the preceding quarter, and 67 per cent less than the $156 million a year ago.

Related articles: Click here for OCBC's news release and financial statements Presentation slides

Several analysts had expected these charges to remain high. The decrease was largely due to lower allowances for other assets - mainly investment securities - as financial markets recovered.

Total NPLs in Q3 stood at $1.43 billion, shrinking 12 per cent from $1.63 billion in the preceding quarter. The NPL ratio also dropped to 1.8 per cent from 2.1 per cent over the same period. NPLs declined because of sharply lower new NPL inflows, higher recoveries and repayments, as well as write-offs.

Mr Conner warned that some bad loans may still emerge, particularly from large to mid-sized corporate portfolios. But 'assuming a reasonable, gradual recovery, we should see NPLs trend down'.

OCBC also benefited from large jumps in insurance, trading and investment incomes in Q3. Life assurance profits rose 44 per cent year-on-year, net trading income grew 59 per cent, and the sale of investment securities brought in a gain.

But these improvements were offset by the impact of a loss of $213 million ($154 million after tax and minority interests) arising from the redemption offer of GreatLink Choice policies by subsidiary Great Eastern Holdings.

As a result, OCBC's non-interest income fell 15 per cent from a year ago to $392 million. Excluding this charge, its non-interest income would have risen 31 per cent to $605 million. OCBC's net interest income stayed relatively flat at $689 million in Q3. This reflected narrowing net interest margins as well as lower loan volumes.

OCBC's gross loans as at Sept 30 stood at $78.7 billion, falling 3 per cent from a year ago. This was due to repayments by corporate customers, reduced loans at overseas branches, and lower trade-related loans.

But the lending business could be improving. 'The bookings of new housing loans are way up,' Mr Conner said. 'We're also seeing a fairly robust pipeline on the corporate side, so we're anticipating the decline in loans to start to turn as early as this quarter.'

The bank said it approved 65 per cent more new private home loans in Q3 compared to the previous quarter. From the applications received, Mr Conner believes that the demand for housing is real and there is no need 'to be particularly concerned' about the property market.

For the first nine months, net profit was up one per cent at $1.46 billion. OCBC shares closed unchanged at $7.53 yesterday.

'There's a good chance that UOB and DBS could surprise as well,' CIMB-GK analyst Kenneth Ng said.