Checking in on OCBC’s First Quarter Results

Overseas-Chinese Banking Corporation (SGX: O39) released its first quarter results earlier this morning.  The headline for its press release shows the bank earning S$696m in after-tax profit for the quarter, a 12% decline from S$832 last year. If gains from the sale of non-core assets were stripped away from last year’s results, OCBC’s after-tax profit would have shown a decline of 12% from S$790m to S$696m.

The bank’s quarterly net interest income slid 4% from S$951m a year ago to S$912m. Even though OCBC’s assets grew, its net interest margin fell from 1.86% to 1.64%, leading to the decline in net interest income. OCBC has seen net interest margins falling every year starting from 2008’s 2.23% and is not alone in this trend. The other local banks, DBS (SGX: D05) and United Overseas Bank (SGX: O39), have also experienced falling net interest margins starting from 2007 for the former and 2010 for the latter.

Given how net interest margin measures the difference between its interest income and interest expense, a persistent decline bears some scrutiny for investors.

Moving on to OCBC’s quarterly non-interest income, it also fell – by 14% to S$676m from S$790m a year ago. The main culprit was the bank’s life-assurance profit, which declined by 19% year-on-year from S$221m to S$178m. This was offset by other bright spots including a 15% growth in Fee and Commission income to S$316m. The growth can be attributed to an increase in wealth management, loan-related and fund management activities. The bank’s insurance business, represented by Great Eastern Holdings, also clocked a 17% rise in business sales helped partly by higher underwriting profit.

To deal with expansion efforts, the bank had increased its headcount by 7%, which contributed to the 8% year-on-year increase in quarterly operating expenses from S$625m to S$672m. Investors will be happy to know that the bank’s non-performing loans ratio had fallen to 0.7%, a decrease of 30 basis points from 1% a year ago. That’s a sign of strength for the bank’s loan portfolio.

Local banks are tightly regulated by the Monetary Authority of Singapore and are subject to stringent capital adequacy requirements, even more so than the internationally-accepted Basel III requirements. On that front, OCBC has capital adequacy ratios (CARs) well in excess of what MAS stipulates. Current rules by MAS require banks to have Common Equity Tier 1 CAR of 4.5%, Tier 1 CAR of 6% and Total CAR of 10%. OCBC scored 16.2%, 16.2% and 18.1% respectively, passing MAS’s rules with flying colours.

OCBC’s Chief Executive Officer, Mr Samuel Tsien had this to say regarding the bank’s performance and outlook: “We are pleased with the continued underlying strength of our customer franchise in both banking and insurance, as demonstrated during the first quarter. Business momentum is strong, and asset quality remains sound. With our solid capital and stable funding base, we will devote additional resources to strengthen the Group’s regional franchise to tap on the higher economic growth potential in our key overseas markets.”

At Monday’s close of $10.92, OCBC’s shares are now selling for 10 times its last-12-month’s earnings and sport a dividend yield of 3.0% based on last year’s full year pay out.

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