OCBC shares up on earnings surprise

A logo of  an OCBC bank is pictured outside an automated teller machine booth in Singapore.
A logo of an OCBC bank is pictured outside an automated teller machine booth in Singapore.PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Shares of Oversea-Chinese Banking Corp rallied after fourth-quarter profit rose more than analysts anticipated. Shares of its two large Singapore rivals fell.

The bank's stock surged on Wednesday (Feb 17) by the most in almost six months following the release of an exchange statement showing net income climbed 21 per cent on higher interest and trading income as well as gains from life insurance.

Chief executive officer Samuel Tsien signaled confidence in the bank's ability to continue growing as Singapore's lenders face pressure from their exposure to a commodity price slump and an economic slowdown in China and Southeast Asia.

OCBC doesn't face issues with its Greater China loan portfolio, he said in a briefing.

On Tuesday, smaller competitor United Overseas Bank reported barely improved quarterly net income on Tuesday as rising expenses and provisions for bad loans restrained earnings growth.

"Against the massively negative sentiments against banks in general and fears of oil and gas impact, OCBC indeed saw higher provisions but nowhere near levels justifying" downgrades for the stock, Kevin Kwek, an analyst at Sanford C Bernstein & Co in Singapore, said in an e-mail. "The positives of gains in net interest and fee income in this environment should also reassure investors."

Analysts had cut their consensus 12-month target price for OCBC's shares to S$9.67 from a peak of S$11.76 last August, according to estimates compiled by Bloomberg.

The lender's stock jumped as much as 4 per cent, the largest intraday gain since Aug 25. The shares were up 1.8 per cent to S$7.91 as of 1:33 pm in Singapore. United Overseas Bank fell 3.2 per cent and DBS Group Holdings declined 0.2 per cent. The benchmark Straits Times Index dropped 0.9 per cent. The rally in OCBC stock pared its loss this year to 10 per cent, exceeding a 9 per cent decline in the Straits Times Index.

OCBC, Singapore's second-biggest bank by assets, said net income climbed to S$960 million in the three months ended Dec. 31 from S$791 million a year earlier. That exceeded the S$877 million average of seven analysts' estimates compiled by Bloomberg.

OCBC's net interest margin, a measure of lending profitability, rose to 1.74 per cent in the fourth quarter, a seven basis-point increase from a year earlier. That helped net interest income climb 5 per cent to S$1.34 billion, the statement showed. Non-interest income advanced 26 percent to S$960 million as the life-insurance unit's profit jumped 24 per cent. Net trading income soared nine times to S$163 million from S$18 million a year earlier.

Non-performing loans rose 54 per cent to S$1.97 billion in 2015, mostly because of "a few large corporate accounts associated with the oil and gas services sector," the bank said. Its bad-loan ratio climbed to 0.9 per cent as of Dec. 31 from 0.6 per cent a year earlier. The loan portfolio remained "sound" with a "comfortable" allowance coverage, the bank said.

At a briefing for media and analysts Wednesday, CEO Tsien said that while he expects an increase in non-performing loans, it's unlikely the bank's NPL ratio will exceed levels during the global financial crisis that started in 2008. In that period, OCBC's soured credit ratio reached 1.7 per cent of total loans. NPLs tied to the oil and gas industry represented 0.39 per cent of the bank's loan book of S$211 billion, he said.

Mr Tsien said pillars of Singapore's economy - such as real estate, retail and oil and gas - have weakened, and that a "challenging operating environment" will continue this year.

"The past year has been a challenging one for most industries," he said in the statement, citing the economic downturn, volatility in financial markets and higher regulatory requirements for capital.

OCBC spent US$5 billion buying Hong Kong-based Wing Hang Bank in 2014. The acquisition helped the bank rely less on revenue from Southeast Asia as China including Hong Kong became its largest source of income after Singapore. Greater China accounted for 20 per cent of pretax profit in 2015, up from 12 per cent in 2014, it said.