OCBC Group Reported Third Quarter 2019 Net Profit of S$1.17 billion
Singapore, 5 November 2019 – Oversea-Chinese Banking Corporation Limited (“OCBC Bank”) reported a net profit after tax of S$1.17 billion for the third quarter of 2019 (“3Q19”). The results included a one-time charge of S$91 million due to a refinement in the Group’s Expected Credit Loss (“ECL”) modelling approach for its Indonesian banking subsidiary, Bank OCBC NISP, relating to allowances for non-impaired assets as it prepares for the introduction of International Financial Reporting Standard 9 Financial Instruments. Excluding this, the Group’s core net profit was S$1.26 billion, higher as compared to S$1.25 billion a year ago (“3Q18”) and S$1.22 billion in the previous quarter (“2Q19”).
Net interest income climbed 6% year-on-year to S$1.60 billion, driven by a 5 basis points rise in net interest margin (“NIM”) to 1.77% from improved asset yields and a 2% increase in customer loans.
Non-interest income for 3Q19 increased 2% to S$1.06 billion from S$1.04 billion in the previous year. Net fees and commissions grew 10% to a new record of S$550 million, led by higher fees from wealth management, investment banking and remittance services. Net trading income of S$182 million was lower than S$213 million a year ago, as a decline in treasury income offset a rise in customer-related flow income. Net gains from the sale of investment securities of S$55 million were higher than the S$4 million reported in 3Q18. Great Eastern Holdings’ (“GEH”) underlying insurance business achieved strong growth ̶ operating profit grew 24% from a year ago, new business embedded value (“NBEV”) rose 30% and NBEV margin improved to 51.3% from 35.9% in 3Q18. However, income from life and general insurance of S$204 million was below S$225 million from a year ago, largely due to fair value movements as a result of lower interest rates used to value its insurance contract liabilities.
Operating expenses rose 6% year-on-year to S$1.13 billion, mainly from a rise in staff costs associated with headcount growth as the Group continued to invest in digitalisation, technology infrastructure and compliance capabilities. The cost-to-income ratio (“CIR”) for the quarter was lower at 42.6% as compared to 44.0% a quarter ago. Net allowances for loans and other assets were S$179 million in 3Q19.
The Group’s share of results of associates increased 16% to S$156 million from S$134 million in 3Q18.
Against the previous quarter, the Group’s core net profit rose 3%. Net interest income grew 1% from 2Q19 through asset growth, while NIM fell 2 basis points as a result of a lower interest rate environment and a drop in the average loans-to-deposits ratio. Non-interest income increased 2%, led by broad-based fee income growth, higher net gains from the sale of investment securities and a 9% rise in income from life and general insurance driven by sales growth and improved NBEV margin. Operating expenses were well-managed and fell 2% from the previous quarter. Net allowances for loans and other assets were higher quarter-on-quarter.
Nine Months Performance
The Group reported a record net profit after tax for the first nine months of 2019 (“9M19”) of S$3.63 billion, which was 2% above S$3.57 billion a year ago (“9M18”). Excluding the charge for the refinement in the Group’s ECL modelling approach for Bank OCBC NISP, core net profit for 9M19 was 4% higher at S$3.72 billion. The year-on-year increase in net profit was driven by earnings growth across the Group’s banking, wealth management and insurance franchise.
Net interest income increased 8% to S$4.72 billion from S$4.37 billion a year ago, spurred by loan growth and an 8 basis points expansion in NIM as higher asset yields outpaced the rise in funding costs. Non-interest income grew 8% to S$3.23 billion from a year ago. Net fee and commission income rose to a new high of S$1.57 billion, driven by broad-based fee income growth. Net trading income increased 32% to S$660 million from S$499 million in 9M18, while net gains from sale of investment securities were S$137 million as compared to S$14 million a year ago. Income from life and general insurance of S$668 million was above S$664 million in the previous year.
The Group’s wealth management business continued to achieve strong growth. Bank of Singapore’s asset under management (“AUM”) climbed 5% year-on-year, underpinned by sustained net new money inflows, to US$110 billion (S$152 billion) as at 30 September 2019. Overall wealth management income for 9M19, comprising income from insurance, private banking, asset management, stockbroking and other wealth management products, rose 10% to a record S$2.46 billion, up from S$2.24 billion a year ago. The wealth management franchise contributed 31% to the Group’s total income as compared with 30% in 9M18.
Operating expenses of S$3.38 billion were 8% higher year-on-year, mainly attributed to an increase in staff costs from annual salary adjustments and a rise in headcount. The CIR was lower at 42.5% as compared to 42.7% in the previous year. Net allowances for loans and other assets were S$539 million for 9M19.
Share of profits from associates rose 27% to S$472 million from S$371 million a year ago.
Annualised return on equity was 11.6% for 9M19, higher as compared to 11.5% for the full year of 2018 (“FY18”). Annualised earnings per share rose to S$1.15, an increase from S$1.06 for FY18.
Allowances and Asset Quality
Overall asset quality remained healthy and the Group stayed vigilant and proactive in monitoring its loan portfolio for early signs of weakness, while continuing to support its customers navigate through challenging operating conditions. Total non-performing assets (“NPAs”) of S$4.19 billion were above S$3.91 billion in the previous quarter, mainly attributable to the downgrade of two corporate accounts. As such, the non-performing loans ratio rose to 1.58% as at 30 September 2019 from 1.47% a quarter ago.
Net allowances for loans and other assets charged for 3Q19 were S$179 million, above the S$111 million set aside in 2Q19.
The Group, in applying the ECL methodology, had taken into account the weaker market outlook and heightened geo-political event risks during the quarter. Additional allowances for non-impaired loans were made from updates of the macro economic variables in the ECL model, while more loans were also downgraded to ECL stage 3. As a result, total cumulative allowances set aside in the balance sheet rose to S$3.26 billion, which included the regulatory loss allowance reserve and the charge for the refinement in the Group’s ECL modelling approach for Bank OCBC NISP. This was higher as compared to S$3.05 billion a quarter ago, and represented 242% of unsecured NPAs as at 30 September 2019.
Funding and Capital Position
The Group’s funding and capital position continued to be strong. As at 30 September 2019, customer loans were S$263 billion, 2% higher than the previous year. Customer deposits rose 5% to S$300 billion, driven by a rise in both the current account and savings deposits (“CASA”) and fixed deposits. CASA grew 3% year-on-year to S$141 billion and represented 47.1% of total non-bank deposits. The Group’s loans-to-deposits ratio was lower at 86.8% as compared to 88.5% in the previous year.
For 3Q19, average Singapore dollar and all-currency liquidity coverage ratios for the Group were 297% and 154% respectively, while the net stable funding ratio was 110%.
The Group’s Common Equity Tier 1 capital adequacy ratio (“CAR”), Tier 1 CAR and Total CAR as at 30 September 2019, were 14.4%, 15.1% and 17.0% respectively, higher than the corresponding ratios of 13.6%, 14.4% and 16.1% from a year ago. The Group’s leverage ratio was 7.6%.
These ratios were all above their respective regulatory requirements.
Commenting on the Group’s performance and outlook, CEO Samuel Tsien said:
“Our performance for this quarter underscored the competitive strength of our diversified business franchise. Balanced growth across our banking, wealth management and insurance businesses allowed us to deliver a quarter-on-quarter and year-on-year increase in core earnings amid a challenging operating environment. Loans rose year-on-year and fee income climbed to a record high led by wealth management as the private banking business continued to attract net new money inflows. Great Eastern reported increased operating earnings and new sales as well as higher business embedded value and margin.
Global and regional economic growth continued to slow, and geo-political event risks have increased. We shall remain vigilant and will maintain prudent risk management practices while exercising disciplined cost management. OCBC’s underlying business is resilient and our strong capital, funding and liquidity position will allow us to deliver robust and sustainable results to our shareholders and all stakeholders.”