SINGAPORE – OCBC Bank on Friday posted second-quarter earnings that were boosted by a rapid rise in market interest rates but offset by higher allowances to buffer for uncertainties in its portfolio amid a challenging macroeconomic environment.

The net profit of Singapore’s second-largest lender rose 34 per cent year on year to $1.71 billion, falling slightly short of the $1.77 billion forecast by analysts in a Refinitiv poll.

The board declared an interim dividend of 40 cents a share, up 12 cents from the same quarter in 2022, to which the scrip dividend scheme does not apply. The interim dividend payout will amount to $1.8 billion, representing a payout ratio of 50 per cent.

Group chief executive Helen Wong said global growth momentum is expected to slow as 2024 approaches, and the bank is watchful of the impact of persistent inflationary pressures and higher interest rates.

“The slowdown in global growth has been impacted by headwinds since the start of the year such as (challenges in) developed markets, banking stress, a faster-than-expected rate rise and the likelihood of a US recession,” she told a results briefing.

Asean economies are resilient, growing at a rate above the global average even as their momentum eases in the second half of the year, she added.

“We also see inflationary pressure and interest rates expected to stay higher, potentially for longer. To buffer for these uncertainties, we took a prudent approach to raise our general allowances,” said Ms Wong, although she added that the bank does not see any systemic risks.

She maintained her forecast of low- to mid-single-digit loan growth, and said it would be “potentially at the lower end”, in 2023.

Customer loans at the end of June grew 2 per cent from a year ago on a constant currency basis, mainly from corporate and housing loans, with Singapore, Australia, the United States and Britain leading the increase.

OCBC’s second-quarter net interest income rose 40 per cent to $2.39 billion. It was driven by asset growth and a 55-basis point increase in its net interest margin – a key gauge of a bank’s profitability – to 2.26 per cent.

Non-interest income grew 11 per cent to $1.07 billion, mainly from net gains from the sale of investment securities and higher profit from insurance. It was partly offset by lower fee and trading income.

Fee income stood at $430 million, down 10 per cent from a year ago, as wealth management activities remained subdued.

Ms Wong said the bank, in line with industry performance, has seen soft wealth management fees in recent quarters as clients continue to be risk-off.

A bright spot comes from wealth inflows, with OCBC attracting $10 billion in fresh funds in the first quarter and $6 billion in the second three-month period.

“Our wealth management AUM (assets under management) base increasing would prepare us to generate more fee income as the market turns more favourable and investment sentiments recover,” she said.

The lender also set aside more allowances for potential bad loans, to the tune of $252 million, compared with $72 million a year ago and $110 million in the first quarter.

Compared with the previous quarter, general allowances climbed from $54 million to $200 million, reflecting a more challenging outlook. Allowances for impaired assets were 7 per cent lower at $52 million.

The bank said the higher general allowances reflect changes in risk profiles of its loan portfolio and greater macroeconomic uncertainty.

It is also watching out for specific risk segments. These include the commercial real estate sector in developed markets, which has come under stress amid rising interest rates and low utilisation of office space.

Total loans to the commercial real estate (CRE) office sector account for 14 per cent of group loans. These loans are largely secured, with a loan-to-value ratio of 50 per cent to 60 per cent, said group chief financial officer Goh Chin Yee.

“Two-thirds of our CRE office loans are in our key markets of Singapore, Malaysia, Indonesia and Greater China. Loans to Greater China comprise mostly loans booked in Hong Kong,” she said.

The CRE office sector in mainland China accounts for less than 0.5 per cent of group loans, while loans to the sector in the US make up less than 1 per cent, said Ms Goh. The sector has especially come under stress in both countries.

She added that such loans in the US are largely secured by Class A office properties and made to the bank’s network customers with strong sponsors.

OCBC’s non-performing loan ratio stood at 1.1 per cent as at June, unchanged from the previous quarter and improving from 1.3 per cent a year ago.

Its results wrap up earnings season for Singapore banks, with larger peer DBS Bank on Thursday reporting a 48 per cent increase in second-quarter net profit to $2.69 billion. On July 27, UOB announced that its earnings jumped 27 per cent to $1.42 billion.

OCBC shares closed 10 cents, or 0.77 per cent, lower at $12.94 on Friday.

DBS rose 49 cents, or 1.45 per cent, to $34.25, while UOB dropped $1.02, or 3.42 per cent, to $28.80.