The Motley Fool

Oversea-Chinese Banking Corp Limited’s 2018 Second-Quarter Net Profit Up 16%

Oversea-Chinese Banking Corp Limited (SGX: O39) was the last among the three big banks in Singapore to release its 2018 second-quarter results. Like its peers, OCBC  had another good quarter with its net profit up 16% year-on-year. Here are the key takeaways from its earnings update.

Financial performance

Total income for the quarter rose 5% year-on-year to S$2.474 million from S$2,351 million recorded in the corresponding quarter last year. The higher income was driven largely by higher net interest income, which rose 8% to S$1,450 million. Non-interest income rose 2% to S$1,024 million. Operating profit rose 6% to S$1,439 million. Lower allowances made during the quarter resulted in the higher net profit. The table below summarises OCBC’s income statement:

Source: Oversea-Chinese Banking Corp Limited 2Q18 Earnings Presentation

Excluding the contribution from its insurance subsidiary, Great Eastern Holding Limited (SGX: G07), bank operations outpaced overall earnings, growing 19% year-on-year.

For the first half of 2018, the group’s net profit rose 22% to S$2,321 million from S$1,903 million a year ago.

Net interest income

Net interest income rose 8% due to higher net interest margin and loan volume growth. Net interest margin rose to 1.67% from 1.65% a year ago. That said, the net interest margins have been stagnating at 1.67% over the last three quarters. Unlike the other two big banks in Singapore, OCBC has not been able to increase its net interest margin in 2018.

The chart below illustrates the bank’s net interest margin and net interest income over the last six quarters:

Source: Oversea-Chinese Banking Corp Limited 2Q18 Earnings Presentation

Non-interest income

Non-interest income rose 2% year-on-year and 12% quarter-on-quarter to S$1,024 million. In total, this segment contributed 41.4% of total income. Non-interest income includes income from insurance, gains from investments, trading income, dividends and rental income; and fees and commissions earned from wealth banking and other services.

The higher non-interest income was driven by higher fees and commissions, trading income, dividends and rental income, and insurance, but partially offset by lower gains from investments.

Notably, wealth management continued its good streak. Income from this segment rose 3%. Asset base has risen by a compounded rate of 23% from December 2014 to December 2017. Wealth management contributed 31% of the group’s income.

Asset quality and liquidity position

One aspect to consider for banks is the percentage of loans that have been defaulted or where interests have not been paid. These are defined as non-performing loans (NPL) and non-performing assets. As of 31 June 2018, the NPL ratio stood at a comfortable 1.38% of total loans.

The loans-to-deposit ratio for Singapore dollar was 88.2%.

The liquidity coverage ratio, a commonly used metric to measure if a bank has the means to pay off its near term obligation should a liquidity crunch occur, stood at 138%. A level above 100% means the bank has sufficient liquidity.

Capital Equity Tier 1 capital adequacy ratio (CET1 CAR) measures the amount of capital the bank has in relation to its risk. Banks in Singapore are expected to have at least a CET1 CAR of 6.5%. OCBC has a ratio of 13.2%. It also has a leverage ratio of 7.0%, which is reasonable for a bank.

In short, OCBC’s capital position remains adequately above regulatory requirements.

Higher dividends for the quarter

Like the other two banks, OCBC has declared a higher interim dividend of 20 Singapore cents per share on the back of its strong performance. The latest dividend is 11% higher than last year. The dividend payout ratio was a comfortable 36%, giving it ample headroom to increase its dividend in the future.

At the time of writing, shares of OCBC exchanged hands at S$11.94 per share, giving it an annualised dividend yield of 3.3%, a price-to-earnings ratio of 10.9 and a price-to-book ratio of 1.2.

Meanwhile, are you worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore's new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades' worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge -- simply click here now to claim your copy.

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.