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OCBC’s Latest Earnings: Firing on All Cylinders

Oversea-Chinese Banking Corporation Limited (SGX: O39), or OCBC, is one of Singapore’s three largest banks. The bank was formed in 1932 from a merger of three banks and is now the second-largest financial services group in Southeast Asia by assets. OCBC’s key markets are Singapore, Malaysia, Indonesia and Greater China, and it has more than 570 branches and representative offices in 19 countries and regions.

OCBC just reported its Q2 2019 earnings and its business was firing on all cylinders. The bank showed improvement in almost all its divisions (except insurance) and demonstrated its ability to grow both top and bottom lines across a variety of functions. That said, macroeconomic risks continue to dampen sentiments and create uncertainties for future growth, and investors need to be mindful of these even as they cheer this quarter’s results.

Improvements on all fronts

Core banking operations posted a 7% year-on-year increase in net profit to S$1.08 billion, driven by increases in both net interest income (9% year-on-year) and non-interest income (8% year-on-year). Net interest income was boosted by customer loans growth of 4% year-on-year as well as an improvement in the net interest margin (NIM) for the bank to 1.79% from 1.67% a year ago. Overall group net profit for the quarter increased by 1% year-on-year due to a higher level of allowances.

Bank of Singapore, OCBC’s private banking arm, saw a 9% year-on-year increase in assets under management (AUM) to US$111 billion, which helped to drive wealth management income up 12% year-on-year for the first half of 2019 to S$1.67 billion. Net fees and commissions also rose slightly due to higher wealth management fees, and the bank’s investment division booked higher gains from the sale of investment securities.

Due to the stellar set of numbers, OCBC bumped up its interim dividend by 25% from 20 to 25 Singapore cents. The bank’s trailing dividend yield is now 4.3% based on the share price of S$11.21 at the time of writing.

Key risks remain

While the bank reported a strong quarter, many risks and uncertainties continue to loom on the horizon, casting a dark cloud over the bank’s ability to continue growing its loan book and NIM.

With US President Trump’s recent surprise declaration of yet another 10% tariff on the remainder of Chinese goods (effectively taxing all Chinese imports), it looks as though the US-China trade war will escalate to a new level. This will dampen business sentiment, raise costs and also hit consumer spending, all of which do not bode well for loan growth.

In addition, the recent Federal Reserve’s decision to cut benchmark interest rates by 0.25% also signals weakness in the US economy, and the reduction in rates will have a negative impact on banks’ ability to grow their NIM.

Yet another risk on the horizon is that of the entrance of digital banks in Singapore as competitors for deposits. Though OCBC’s Current Account Savings Account (CASA) deposits increased by 3% year-on-year, growth may slow once the Monetary Authority of Singapore (MAS) hands out the five digital banking licenses sometime next year.

Clear growth strategies and initiatives

Investors need to remain watchful but should continue to show confidence in OCBC’s ability to grow and manage its risks. CEO Samuel Tsien has mentioned that the bank has a clear-cut corporate strategy for deepening and broadening its reach in its core markets of Singapore, Malaysia and Greater China. This focus implies that the bank will not spread its resources out too thinly and that it will continue to work on strengthening its franchise in these three countries.

Investors, meanwhile, can look forward to possibly higher dividends in future years as the bank slowly raises its dividend pay-out ratio. There is also a scrip option where a 10% will be given on the volume-weighted average price for the shares, and investors can make use of this option to compound their dividends.

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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 recommended shares of Oversea-Chinese Banking Corporation Limited. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.