OCBC, UOB cautiously optimistic on growth outlook as Q2 earnings beat forecasts

The banks' chiefs said the resurgence of Covid-19 cases will not heavily affect growth prospects.
The banks' chiefs said the resurgence of Covid-19 cases will not heavily affect growth prospects.ST PHOTO: KUA CHEE SIONG

SINGAPORE - Local banks OCBC and UOB remained cautiously optimistic on their growth outlook despite the surge in Covid-19 cases regionally, as their earnings continued to rebound from last year.

The lenders posted better-than-expected net profit for the second quarter on the back of lower allowances for bad loans.

Singapore's second-largest lender OCBC's second-quarter net profit rose 59 per cent from a year ago to $1.16 billion - slightly ahead of the $1.14 billion average estimate of analysts polled by Bloomberg.

Meanwhile, smaller peer UOB's earnings climbed 43 per cent to $1 billion, topping the $968 million average forecast.

The lenders' earnings, however, were less rosy compared with the previous quarter. OCBC's net profit fell 23 per cent from a record $1.5 billion in the first quarter, while UOB's remained flat.

Both banks raised dividends after the Monetary Authority of Singapore last month lifted restrictions that capped dividend payouts from local banks and finance companies at 60 per cent of the previous year's dividend amid the Covid-19 pandemic.

OCBC declared an interim dividend of 25 cents per share for the first half of the year, up from 15.9 cents a year ago, representing a payout ratio of 42 per cent against the group's first-half net profit

UOB's interim dividend was 60 cents per ordinary share, compared with 39 cents a year ago, translating to a dividend payout ratio of 50 per cent.

The banks' chiefs said the resurgence of Covid-19 cases, including those of the highly infectious Delta variant, will not heavily affect growth prospects, as the lenders have made ample provisions against bad loans and countries have ramped up vaccinations.

OCBC's group chief executive Helen Wong said she does not foresee the surge in cases disrupting economic recovery, although it might slow its pace in certain markets.

The bank's non-performing loans in Malaysia rose 17 per cent year on year to $959 million in the second quarter, while those in Indonesia increased 22 per cent to $883 million. These loans in Singapore fell 30 per cent to $1.3 billion.

"The resurgence of the Covid-19 variant has caused a setback on the economic growth that started in the first half of the year (in Malaysia and Indonesia)," said Ms Wong, adding that the bank expects to see some non-performing loan formation in Malaysia amid the country's loan relief programme and is putting in place provisions for it.

"Due to the situation and some of the stricter measures, we remain prudent in considering expansion in these two economies," she said, adding that the speed of vaccination drives is also an important factor.

Malaysia accounts for 16 per cent of the group's operating profit and Indonesia 7 per cent.

Over at UOB, deputy chairman and chief executive Wee Ee Cheong said: "On the face of it, especially in Asean, we are still in the middle of the Covid-19 crisis, but there are also government relief programmes, and we also step in to help our customers prolong repayment."

He added that the bank has set aside ample allowances and helped customers restructure their loans.

Pointing to higher vaccination rates, Mr Wee added: "We are still fairly optimistic about the next six to 12 months."

However, the lender is not writing back general provisions just yet.

UOB group chief financial officer Lee Wai Fai said: "We see economic recovery (in the region) but a lot of these are at a lower pace and more towards next year... I don't see (Covid-19 and the general economic conditions) improving to an extent that I can write back general provisions.

Mr Eugene Tarzimanov, vice-president and senior credit officer at Moody's Investors Service, expects that non-performing loans for OCBC and UOB will increase moderately over the rest of this year and the next, particularly in both banks' foreign operations. However, he added, their ample reserves and improved earnings will provide them with good buffers.

UOB's second-quarter net interest income rose 8 per cent to $1.58 billion, led by loan growth of 6 per cent and an eight basis point increase in net interest margin - a key gauge of banks' profitability - to 1.56 per cent.

Net fee and commission income grew 34 per cent to $595 million, driven by growth in wealth management, loan-related and fund management fees. Other non-interest income declined 32 per cent to $243 million, mainly from a drop in non-customer-related gains.

Total allowances more than halved to $182 million as much of the pre-emptive general allowance was taken last year, said UOB.

Meanwhile, OCBC's net interest income fell 2 per cent to $1.46 billion. Its net interest margin declined two basis points to 1.58 per cent.

Non-interest income dipped 3 per cent to $1.11 billion in the second quarter, mainly due to lower trading, investment and insurance income and partly offset by a 28 per cent increase in fee income.

OCBC's fee income for the second quarter rose to $563 million from $440 million a year ago.

It also set aside lower allowances as operating conditions improved, with total allowances falling to $232 million from $750 million a year ago.

OCBC's net profit for the first half of this year surged 86 per cent to $2.66 billion, while UOB's rose 29 per cent to $2.01 billion.

OCBC's shares rose 1.63 per cent to $12.44 at about 1pm, while UOB's climbed 1.82 per cent to $26.32.

Singapore's largest lender, DBS, will report its results on Thursday.