Overseas-Chinese Banking Corp. Limited Just Saw A 62% Jump in Profit: Here’s What Investors Need to Know

Overseas-Chinese Banking Corp. Limited (SGX: O39) released its third quarter results yesterday morning.  The title for the bank’s press release gave a good indication of how the bank did for the quarter: “OCBC Group Reports Third Quarter 2014, Net Profit after Tax up 62% to S$1.23 billion”

The fuel for growth

The bottom-line growth enjoyed by the bank in its third quarter was primarily attributable to the one-off gain of S$391 million resulting from OCBC increasing its ownership of Bank of Ningbo to 20%. More details on OCBC increasing its stake in the Chinese bank from 15.34% to 20% can be found here.

If the one-off gain was stripped away, OCBC’s core net profit still managed to advance by 11% to S$841 million, propelled by a 27% increase in net interest income. The rise of 5 basis points to 1.68% for the bank’s net interest margin, which came on the bank of higher loan spreads and higher returns from money market activities, played a significant role in the growth in net interest income.

Interestingly, the other two local banks – DBS Group Holdings Ltd (SGX: D05) and United Overseas Bank Ltd (SGX: U11) – have also seen their net interest margins tick up in recent earnings’ reports. Rising net interest margins paint a good outlook for banks as they can signify higher profits for the same amount of loans made.

Another growth-driver for OCBC’s net interest income was a 27% year-on-year increase in customers loans to S$205 billion, with the newly-acquired Wing Hang Bank (now renamed OCBC Wing Hang) contributing S$24.9 billion to the increase. If the acquisition-related gains were stripped away, OCBC’s loan growth still managed to come in at 11%.

Moving on to OCBC’s quarterly non-interest income (each bank has two sources of ‘revenue’ – net interest income, and non-interest income), it inched up 3% year-on-year to S$801 million from S$779 million a year ago. The slight uptick can be credited to higher fee and commission income, driven by strong growth in wealth management, loan, and trade fees. In addition, net trading income also more than doubled from S$47 million to S$113 million for the quarter, on the back of stronger treasury-related income from customer flows.

Business direction

With the blockbuster multi-billion-dollar acquisition of OCBC Wing Hang, OCBC now has a stronger gateway into the Greater China region. This is a great opportunity for OCBC to tap into and to achieve that, the bank has embarked on a Greater China Strategy. The strategy is described below in the bank’s own words:

1. Leverage Group resources to accelerate Wealth Management, Retail & Commercial Banking and Insurance business growth supported by an enlarged product suite, expanded geographical coverage and bigger consumer franchise

2. Capture trade, capital and wealth flows associated with increased economic interconnectivity between Greater China and South East Asia; and capitalize on cross border investment and wealth management opportunities arising from growing wealth accumulation in the region

3. Strengthen customer deposit funding base in USD and RMB for OCBC Group

Financial position

For the quarter ended 30 September 2014, OCBC’s asset-quality (in other words, the quality of its loan portfolio), is commendable as its non-performing-loan (NPL) ratio is only 0.7%.

Investors would also be happy to note that capital adequacy ratios (CARs) for OCBC, a measure of the bank’s ability to absorb losses, remain well above the Monetary Authority of Singapore’s requirements. For the quarter, the bank’s Common Equity Tier 1 CAR is at 13.2%; Tier 1 CAR’s at 13.2%; while Total CAR is at 15.5%. These figures easily surpass MAS’s requirement of 5.5%, 7%, and 10% respectively. It should be noted however, that it was a recent rights issue by OCBC, which raised S$3.3 billion in net proceeds, that had helped to strengthen the bank’s balance sheet and improve its CARs.

There were previous fears that OCBC’s major acquisition of OCBC Wing Hang may cause the bank to over-extend itself. But, investors can take heart that the bank’s balance sheet is still well-capitalised (as seen in the high CARs) and its loan portfolio has not deteriorated (as deduced from the low NPL ratio). Also, investors might want to note that the “integration [between OCBC and Wing Hang] has been effective and smooth at both the customer-facing and operational levels,” according to OCBC’s Chief Executive, Samuel Tsien.

At Thursday’s close of S$9.69, OCBC’s shares are now selling for 1.3 times its book value and sport a dividend yield of 3.7% based on last year’s full year payout.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.