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

Oversea-Chinese Banking Corp Limited (SGX: D05) reported its earnings for the quarter and year ended 31 December 2016 this morning.

As a quick background, OCBC is one of the three major banks based out of Singapore. It also happens to be the longest established bank here and has operations in 18 countries and regions. The bank also counts the insurance company Great Eastern Holding Limited (SGX: G07) as a subsidiary.

You can learn more about OCBC in here.

Financial highlights

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

  1. For the fourth quarter of 2016, net interest income for OCBC fell by 7% year-on-year to $1.25 billion. OCBC ended the year with $5.1 billion in net interest income, down 3% from 2015.
  2. Non-interest income for the reporting quarter was down 4% to $926 million compared to the same period in 2015. The bank ended 2016 with non-interest income of $3.44 billion, also down 3% from a year ago.

Taken together, OCBC made $2.2 billion in total income for the fourth quarter of 2016, or 5% below 2015’s fourth-quarter. For the full year, OCBC earned $8.49 billion in total income. This compares with 2015’s $8.72 billion in total income.

On the expense side of things:

  1. OCBC’s operating expenses rose 1% year-on-year to $981 million for the fourth quarter of 2016. For the full year, operating expenses was up 3% to $3.79 billion.
  2. Allowances for loans and impairment for other assets for the reporting quarter spiked by 57% year-on-year to $305 million. For 2016, allowances totalled $726 million, up 49% from 2015.

All told, OCBC’s 2016 fourth quarter net profit attributable to shareholders was $789 million, some 18% lower compared to 2015’s fourth-quarter. For 2016, net profit attributable to shareholders was down 11% to S$3.47 billion. OCBC ended 2016 with a net asset value per share of $8.49, up 5.7% from $8.03 in 2015.

The bank’s board of directors proposed a final dividend of $0.18 per share, bringing OCBC’s total dividend for 2016 to $0.36 per share. This is unchanged from the bank’s 2015 dividend.

Operational highlights and management comments

OCBC’s net interest income in 2016 had declined due to a fall in average interest earning assets. The bank recorded a net interest margin (NIM) of 1.63% for the reporting quarter, down from the 1.74% seen a year ago. For the full year, the NIM was 1.67%, unchanged from the year before.

Meanwhile, the 4% decline in non-interest income in the fourth quarter was largely due to lower insurance income from Great Eastern. This was offset by higher fees and commissions and net gains from investments.

OCBC’s customer loans was up 5% from a year ago to end 2016 at $220 billion. The non-performing loan ratio was 1.3% as of 31 December 2016, representing a deterioration from the ratio of 0.9% recorded a year ago. Elsewhere, OCBC ended 2016 with $261 billion in customer deposits, up from $246 billion a year ago. The bank reported a loans-to-deposits ratio of 82.9% for the fourth quarter of 2016, down from the 84.5% seen in the same quarter in 2015.

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%.

From this perspective, OCBC can be considered as well capitalized given that its CARs are comfortably higher than MAS’ requirements. The bank reported CET1, Tier 1, and Total CARs of 14.7%, 15.1%, and 17.1%, respectively.

OCBC’s chief executive, Samuel Tsien, summarized the bank’s performance in 2016 with the following passages:

“Despite difficult business conditions that prevailed throughout the year, the Group delivered a resilient performance. Our results were underscored by the strength of our well-diversified franchise that continues to drive consistent and balanced long-term growth.

The Barclays Wealth acquisition further strengthened our wealth management presence, a franchise which continued to perform well. Great Eastern achieved strong underlying new sales and net embedded value growth, while our Indonesian and Hong Kong banking operations also reported higher contributions to the Group.

The overall quality of our portfolio remained sound. Against the weak operating environment, however, there continued to be stresses in parts of the portfolio, particularly within the oil & gas support services sector which drove increases in non-performing loans and allowances.

We shall remain vigilant and will continue to help our clients in the impacted sectors to de-leverage and restructure their debts while being prudent in our risk management processes. At the same time, we have tightly controlled our cost base and further strengthened our strong liquidity and capital positions.

Looking ahead, while the headwinds facing the broad economy are likely to persist, we are confident that we are well-positioned to support our valued customers through this difficult period and capture new opportunities as they arise across our franchise.”

At its opening share price of $9.44 today, OCBC has a trailing dividend yield of 3.8% and a price to book ratio of 1.2.

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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.