The investment market volatility and the struggling oil and gas sector hit first-quarter earnings at OCBC Bank and raised concerns about credit quality.
Net profit was down 14 per cent year on year to $856 million in the three months to March 31, below the $899 million average forecast by economists in a Bloomberg poll. This came as revenue slid 2 per cent to $2.06 billion.
Earnings were partly weakened by a 58 per cent drop in life assurance profit to $83 million, mainly due to unrealised, mark-to-market losses from the bond and equity investment portfolio at OCBC subsidiary Great Eastern.
As a result, non-interest income dropped 12 per cent to $753 million, with wealth management fee income also down amid the weak investment appetite in the first half of the quarter.
The insurance unit has recorded major mark-to-market losses before but group chief executive Samuel Tsien stressed these were only paper losses. He said at a briefing yesterday: "If we were to sell these bonds now, we would incur an actual loss, but our intention is to hold the bonds until maturity, so all the current fluctuations will not be realised. It is only in accounting terms where we look at how much we would lose if we liquidated the company and its investments now."
But he was less sanguine on the bank's loan book exposure to the oil and gas sector amid the prolonged commodity crunch. "The market is indeed weakening. The oil and gas portfolio issue has not broadened, but it has deepened," he warned.
AT A GLANCE
$2.06 billion (-2%)
NET INTEREST INCOME:
$1.31 billion (+5%)
$856 million (-14%)
OCBC's oil and gas non-performing loans (NPLs) were mostly in the offshore and related services sector, at around $897 million.
The sectorial weakness pushed total NPL ratio to 1 per cent, up from 0.6 per cent a year ago and 0.9 per cent in the previous quarter, while the amount of NPLs rose from $1.97 billion in the fourth quarter of last year to $2.15 billion.
But these alarming figures only reflected a "conservative" approach in managing the portfolio, Mr Tsien said, adding that the bank classifies all loans that have been restructured as non-performing, when in fact 61 per cent of the offshore and related services non-performing loans are actually still servicing at least interest and, in most cases, some principal as well.
As part of that cautious stance, the bank also set aside more to cover for potential loan impairment, with net allowances rising 162 per cent year on year to $167 million - another major earnings drag.
Meanwhile, overall loans growth will remain subdued this year, having expanded only 1 per cent in the first quarter in constant currency terms. But net interest income still grew 5 per cent to $1.31 billion, as net interest margins rose from 1.62 per cent a year ago to 1.75 per cent.
Mr Tsien believes net interest margins will remain stable despite weaker interest rates as the banking industry becomes more disciplined with pricing to ensure a better spread.
Net asset value was $8.20, up 5.1 per cent year on year, while earnings per share was 82.2 cents, down 17.6 per cent year on year.
OCBC shares closed down 13 cents or 1.46 per cent at $8.77 after the results announcement.