Is Oversea-Chinese Banking Corp Limited’s Malaysian Banking Business at Risk?

Of the three major banks in Singapore, Oversea-Chinese Banking Corp Limited (SGX: O39) would be the one with the largest exposure to the banking scene in Malaysia.

From the bank’s latest financials (for the quarter ended 31 March 2015), 14% of its customer loans are issued in Malaysia and the country accounted for 17% of its pre-tax profit for the quarter.

Unfortunately, Malaysia’s economy seems to be in a difficult spot right now. Some issues which are plaguing Singapore’s northern neighbour include: A cool down in the property market; the crisis involving the country’s 1MDB development fund; and signs of a slowdown in the economy as a result of the implementation of the Goods and Services Tax.

The banks in Malaysia are also feeling the heat. Two of Malaysia’s largest banks, CIMB Group Holdings Berhad and Affin Holdings Berhad, both reported significant increases in impairment losses in their latest quarterly results (also for the quarter ended 31 March 2015).

The impairment losses had ate dramatically into the bottom-line of both CIMB and Affin Holdings, so much so that their quarterly net profits had experienced year over year declines of 45.5% and 75.6% respectively.

Would OCBC’s banking operations in Malaysia suffer a similar fate in the near future? According to OCBC’s latest financials, its business in Malaysia is still growing strongly.

Net interest income there had jumped by 12% from a year ago and the non-performing loan ratio had actually decreased from 2.3% to 1.9%. Moreover, allowances for impairment losses for the quarter fell 14% year over year (in comparison, CIMB’s allowances for impairment losses had soared by 380% year over year in the first quarter of 2015). All these had helped OCBC Malaysia to post a 7% increase in net profit to RM232 million for the quarter.

Foolish Takeaway

Judging from the differences in the performance between OCBC Malaysia and the pair of CIMB and Affin Holdings in the-first quarter of 2015, it’s perhaps fair to say that what’s happening to the large Malaysian banks now would likely not be an indication of the future for OCBC Malaysia. It should also be noted that huge jumps in impairment losses are also not that common amongst traditional financial institutions.

But that being said, investors should always remain observant for adverse changes to OCBC Malaysia’s business.

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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 writer Stanley Lim does not own any companies mentioned above.