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3 Positives From Overseas Chinese Banking Corporation Limited’s 2017 Results

2017 was a stellar year for banks in general. Rising interest rates, a buoyant home loan market and the recovery of oil prices have all been catalysts for improved performance of local banks. Overseas Chinese Banking Corporation Limited (SGX:O39) was one of the banks to benefit from the recent macroeconomic tailwinds. Not only did the bank post a 19% increase in net profit to new record highs, it also rewarded shareholders by increasing its dividends by 2.7% for the year.

But that’s not all. Beyond these impressive headline numbers, there are major positive trends that should bode well for the bank’s future.

Net interest margins rising

The past year saw the banks net interest margin rise successively each quarter. Net interest margin is the difference between the bank’s cost of capital and the interest it charges for the loans that they offer. A higher net interest margin is generally positive for banks as they can earn more on its loans.

The net interest margin for the bank has risen 5 percentage points from 1.62% in the first quarter to 1.67% in the last quarter of the year. With the Fed expected to increase rates further this year, OCBC is likely going to be able to capitalise on the rising interest rates margins to widen its interest margin further in 2018.

Cost-to-income ratio improvement

The banks expenses rose at a slower pace than its income. Consequently, the bank managed to improve its cost-to-income ratio to 41.9%, from 44.6% a year ago.

More importantly, the bank has been able to lower its cost-to-income ratio each quarter during the year. It started with a 43.3% cost-to-income ratio in the first quarter of 2017, but has since lowered that to 40.6% in the fourth quarter. If the bank is able to sustain the lower cost-to-income ratio, it will be able to drive more of its revenue down to the bottom line in the coming years.

Loan-to-deposit ratio room for growth

With a loan-to-deposit (LDR) at 82.5% in December of 2017, the bank still has room to increase its loan capacity.

The LDR is a common measure to assess whether the bank is using its available assets optimally. Ideally a bank can increase its LDR ratio up to 90%, as long as it maintains other regulatory requirements. With the recent local en-bloc frenzy, strong regional economic growth, there is certainly room for OCBC to increase its loans.

The bank also broke down its LDR by currency. Notably, the bank’s LDR for USD and RMB were at 65.8% and 61.3%. This is lower than the bank’s recent history and it certainly can increase its customer loans in these two currencies. If the bank can make use of the excess liquidity, it can increase interest income in the coming years.

The Foolish bottom line

OCBC, like the other banks in Singapore, has taken advantage of the positive macro-economic conditions to post a stellar set of results for 2017. More pertinently for shareholders, beyond the headline numbers there are plenty of other positive trends that bode well for the bank. Not only does it have room to grow its interest income further, the bank has also managed to keep its expenses low, widening its profit margin and ROE in the process. Together with a positive economic outlook, the future certainly looks bright for OCBC and its shareholders.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.