Oversea-Chinese Banking Corp Limited’s Latest Earnings: What Investors Should Know

Oversea-Chinese Banking Corp Limited (SGX: O39) reported its second-quarter earnings this morning. The reporting period was for 1 April 2016 to 30 June 2016.

As a brief background, Oversea-Chinese Banking Corp (or OCBC for short) is one of the three major banks based out of Singapore, alongside DBS Group Holdings Ltd  (SGX: D05) and United Overseas Bank Ltd (SGX: U11).

OCBC is the longest established bank in Singapore, and has operations in 15 countries. It counts insurer Great Eastern Holding Limited (SGX: G07) as a subsidiary. You can learn more about OCBC in here or catch the results from its previous quarter here.

With that, let’s look at the bank’s latest earnings.

Financial highlights

The following’s a quick rundown on OCBC’s income (essentially the “revenue” for the bank):

  1. For the second-quarter of 2016, net interest income was down 2% year-on-year to $1.26 billion.
  2. Non-interest income also fell by 16% to $788 million, compared to the same period last year.

Taken together, OCBC made $2.05 billion in total income for the second-quarter of 2016, or 8% below 2015’s second-quarter.

On the expense side of things:

  1. OCBC’s operating expenses rose 1% year-on-year for the reporting quarter.
  2. Allowances for loan and impairment of other assets for the quarter was up 9% year-on-year to $88 million.

The good thing is the bank’s share of results from associates increased slightly from $102 million in the second-quarter of 2015 to $103 million in the reporting quarter.

When total income, all expenses, and share of results from associates are taken together, OCBC’s 2016 second-quarter net profit is $885 million, some 15% lower compared to the second-quarter of 2015.

But, OCBC’s board of directors had proposed an interim dividend of $0.18 per share, unchanged from 2015’s interim dividend.

OCBC also grew its net asset value per share to $8.19 in the second-quarter of 2016, up 5% from $7.80 last year. But, this is down slightly from the net asset value of $8.20 recorded in the first-quarter of 2016.   

Operational highlights

The bank’s net interest income declined due to a drop in interest earning assets, which offset an improvement in the net interest margin. OCBC recorded a net interest margin of 1.68% for the second-quarter of 2016, up a notch from the 1.67% recorded in the second-quarter of 2015.

Meanwhile, non-interest income had declined due to lower contribution from Great Eastern. The segment was also hampered by lower brokerage and investment banking income. For more on Great Eastern’s earnings, go here.

As of 30 June 2016, OCBC’s customer loans stood at $205 billion, down 2% from a year ago. Meanwhile, OCBC ended the reporting quarter with $246 billion in customer deposits, unchanged from a year ago. The loan to deposit ratio was 82.2%, down from the 84.3% recorded last year.

Elsewhere, the non-performing loan (NPL) ratio was 1.1%, a deterioration from the NPL ratio of 0.7% seen a year ago.

Based on regulatory requirements from the Monetary Authority of Singapore, banks in Singapore must have the following Capital Adequacy Ratios (CARs): Common Equity Tier 1 (CET1) CAR of at least 6.5%; Tier 1 CAR of at least 8%; and Total CAR of at least 10%.

OCBC’s CARs are way higher than the standards MAS have set. The bank reported CET1, Tier 1, and Total CARs of 14.9%, 15.5%, and 17.5% respectively.

Here is OCBC’s chief executive Samuel Tsien commenting on the results in the reporting quarter and the bank’s outlook:

“Our second quarter performance was resilient amid uncertain global economic conditions.

Against a very strong second quarter of 2015 which included a substantial gain from the sale of an equity investment under Great Eastern, our earnings were lower as unrealised mark-to-market losses in our insurance subsidiary resulting from market volatility further reduced contributions to the Group.

Excluding Great Eastern, operating profit from our banking operations was flat against the prior year and up 3% against the prior quarter.

Credit quality is well-maintained, and our small European exposure was not adversely impacted by the recent market dislocations. We continued to be conservative in our loan classification and specific allowances provisioning to ensure that the Bank is prudently covered for the risks associated with the current operating environment.

We will continue to grow our businesses prudently, supported by our diversified sources of earnings and strong funding and capital position. We are well-positioned to weather the uncertainties ahead and capture new opportunities as they arise.”

At its opening share price of $8.75 today, OCBC has a price-to-book ratio of 1.07 and a trailing dividend yield of 4.1%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.