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Oversea-Chinese Banking Corp. Limited’s Full-Year 2018 Earnings: Weak Fourth Quarter But Higher Final Dividend

Oversea-Chinese Banking Corp. Limited (SGX: O39) released its full-year 2018 (FY 2018) earnings on Friday morning. OCBC is one of the big three banks in Singapore and offers a suite of banking services in Singapore and parts of Asia. Here are 13 key highlights from the bank’s full-year earnings report:-

1. Net interest income (NII) rose 9% year on year for 2018 to S$5.9 billion, but was offset by a 7% year on year decline in non-interest income. The combination resulted in total income rising by 2% year on year to S$9.7 billion from S$9.5 billion. For the fourth quarter of 2018 (4Q 2018), total income fell by 11% year on year due to a large decline (-32% year on year) in non-interest income from S$1.2 billion a year ago to just S$830 million in the latest quarter.

2. FY2018 operating expenses rose 4% year-on-year to S$4.2 billion, resulting in operating profit before allowances and amortisation being flat year-on-year at around S$5.5 billion. 4Q 2018 saw a decline of 19% year-on-year in operating profit before allowances and amortisation to S$1.3 billion, mainly due to expenses remaining flat even while non-interest income declined.

3. After accounting for allowances and amortisation, operating profit was up 8% year on year for FY 2018 at S$5.1 billion. A 57% year on year drop in allowances for loans led to the improved operating profit performance.

4. Net profit attributable to shareholders increased by 11% year on year for FY 2018 to S$4.5 billion. For 4Q 2018, net profit declined by 11% year on year to S$926 million.

5. Net interest margin (NIM) rose by 0.05% from 1.65% in 2017 to 1.70% in 2018, contributed by higher NIMs from Singapore, Malaysia and Greater China. 4Q 2018 NIM at 1.72% was unchanged from 3Q 2018 but showed an improvement over 4Q 2017 when NIM was at 1.67%.

6. The large decline in non-interest income for FY 2018 was due to significantly lower trading income in 4Q 2018 as well as lower net fees and commissions. 2017 also had a higher base as that year included substantial gains from Great Eastern Holdings’ (SGX: G07) divestment of investments.

7. OCBC saw a healthy 9% year on year growth in their loan book to S$258 billion, contributed by all key markets. Singapore formed 42% of all loans while Greater China formed 25%. Of the loan book, the largest bulk (25%) was for housing loans while 21% was for building and construction loans.

8. The non-performing loans (NPL) ratio stood at 1.5%, and was constant compared to fiscal year 2017. Allowances were higher (up 14% year on year) in 4Q 2018 due to allowances for loans made to the general commerce sector and also selected oil and gas names.

9. The bank’s Common Equity Tier 1 capital adequacy ratio (CAR) as at end-2018 was 14.0%. Its Tier 1 CAR and total CAR were 14.8% and 16.4% respectively, and were all above their respective regulatory requirements.

10. Cost to income ratio (CIR) rose to 45.9% in 4Q 2018, and was mainly due to a fall in trading income as well as unrealized mark to market losses from Great Eastern’s investment portfolio. For FY 2018, CIR was 43.4% against 42.4% a year ago.

11. Despite the weaker fourth quarter results, OCBC declared a final dividend of S$0.23 per share, which was 21% higher than last year’s S$0.19 per share. The final dividend brings full year 2018 dividends to S$0.43 per share, higher than FY 2017’s S$0.37 per share. At the last done share price of S$11.57 as at 21 February 2019, OCBC has a trailing dividend yield of 3.7%.

12. OCBC’s net asset value per share (before valuation surplus) stood at S$9.56 as at end-2018. Using the last done share price of S$11.57, the bank is trading at a price-to-book ratio of around 1.2 times.

13. CEO Mr. Samuel Tsien had this to comment on OCBC’s results and prospects:-

“Looking ahead, global economic growth is expected to slow on concerns of continued trade and geopolitical tensions, subdued market and investment sentiments and rising policy risks in the advanced economies. In spite of the uncertain outlook, we are confident that our focused strategy, strong capital and funding base, and disciplined cost control will allow us to continue to prudently expand our franchise in our key markets and support our customers.”

The Foolish Bottom Line

Despite a weaker fourth quarter, OCBC still managed to pull off a respectable full-year performance. The bank reported improved NIM and also stable NPL ratio, while bumping up both interim and final dividends to reward shareholders. Fee and other income were affected by the market volatility and turbulence witnessed in 4Q 2018 but this should resolve itself over time. OCBC’s net profit has hit a new record high and loan growth continues to be healthy. Investors should keep an eye out for weakness in the economy which may translate to more provisions and allowances. Trading at a dividend yield of 3.7% and price-to-book of 1.2x, OCBC still offers good value for investors who are keen on participating in the economic growth in Asia.

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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in any of the companies mentioned.

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has a recommendation for Oversea-Chinese Banking Corparation. The Motley Fool Singapore writer Chin Hui Leong does not own shares in any of the companies mentioned.