OCBC Q1 profit jumps 39% to record $1.88 billion; CEO cautious on tighter financial conditions

OCBC's second-quarter earnings beat the $1.74 billion forecast by analysts in a Refinitiv poll. PHOTO: REUTERS

SINGAPORE – OCBC Bank on Wednesday posted record first-quarter earnings amid higher interest rates, even as its chief executive cautioned that tighter financial conditions might slow global economic growth and elevate overall risks.

Singapore’s second-largest lender saw its net profit rise 39 per cent year on year to $1.88 billion, beating the $1.74 billion estimate by analysts in a Refinitiv poll.

OCBC’s net interest income rose 56 per cent to $2.34 billion amid a 5 per cent growth in average asset balances.

Net interest margin (NIM) – a key gauge of a lender’s profitability – shot up by 75 basis points to 2.3 per cent following the US Federal Reserve’s series of interest rate hikes.

NIM compares the interest income a bank generates from credit products like loans and mortgages with the interest it pays out, such as to savings accounts or fixed deposits.

Meanwhile, OCBC’s non-interest income slipped 11 per cent to $1.01 billion. It was weighed down by declining wealth management fees that were partly offset by a rise in trading income and net realised gains from the sale of investment securities.

Group chief executive Helen Wong said the bank is watchful of tighter financial conditions but confident of long-term prospects in its key Asian markets, adding that it has ample buffers for uncertainties and to pursue growth opportunities.

The bank set aside total allowances of $110 million for potential bad loans, up from $44 million a year ago, mainly due to higher general allowances. But the amount was lower than the $314 million set aside in the fourth quarter that included pre-emptive general provisions for the real estate sector.

OCBC has also been carrying out more stress tests on commercial real estate in developed markets like the United States and Britain amid contagion risks from recent US regional bank failures, Ms Wong told reporters.

Group chief financial officer Goh Chin Yee noted that the bank’s commercial real estate loans are mostly made to network customers who have strong financials and track records.

Ms Wong said OCBC is also carrying out stress tests to assess the impact of the fresh round of property cooling measures in Singapore that might dampen mortgage sales.

A bright spot comes from China’s reopening, given that Greater China is a key region for OCBC outside Singapore. Ms Wong noted that the bank has started to see growth in cross-border flows as China opens up.

On the whole, growth in non-trade corporate loans and mortgages offset softer trade loans, while the wealth management business continued to attract net new money inflows, she added.

OCBC attracted $10 billion in such inflows in the first quarter – a “sizeable amount which we want to be able to maintain”, said Ms Wong.

Meanwhile, the bank will have to contend with a likely peak in its margins as the Fed comes to the end of its rate-hiking cycle, as well as slowing loan growth amid the higher rates.

Ms Wong expects NIM to come in around 2.2 per cent in 2023 amid low- to mid-single-digit loan growth, comparable with her previous forecast for mid-single-digit growth.

“The loan book does not have a lot of potential to be repriced upwards, but the funding costs will continue to catch up – a natural phenomenon in a rapidly rising interest rate environment,” she said, adding that rates have probably peaked, but that the Fed is unlikely to make any cuts in 2023.

There is also the risk of non-performing loans rising in 2023 amid the high rates, she said, even as the bank’s non-performing loan ratio improved to 1.1 per cent in the first quarter versus 1.4 per cent a year ago.

OCBC, which pays dividends half-yearly, saw its first-quarter earnings grow by 44 per cent compared with the previous quarter. A rebound in wealth management activities drove a 14 per cent increase in fee income to $453 million and reversed declines over the past year.

Ms Wong said investor sentiment recovered somewhat in the first quarter, but the momentum has yet to bounce back strongly due to volatility in the financial markets.

But the net new money inflows are encouraging, she said.

“Eventually, as investment sentiment comes back, we can offer products and utilise this increase in our AUM (assets under management).”

OCBC’s numbers wrap up local banks’ earnings season. The net profit of Singapore and South-east Asia’s largest lender DBS climbed by 43 per cent to $2.57 billion, while UOB’s rose by 67 per cent to $1.5 billion.

OCBC shares closed 0.57 per cent higher at $12.32 on Wednesday.

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