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Morningstar | Stronger 1Q Profit Allows OCBC to Increase Provisioning for Existing Oil and Gas Exposure

OCBC posted a strong first-quarter result, with net profit 11% higher than the same period last year at SGD 1.23 billion, and much stronger than SGD 926 million in the fourth quarter of last year. As previously noted, the fourth quarter was soft for most banks in the region as weak investor sentiments lowered net fee income and the adverse capital market conditions resulted in a decline in net trading income. Both net fee and trading income have bounced back in the first quarter with a recovery in capital markets resulted in higher wealth management fees. Overall net fees and commission income was 4% higher against last quarter while net trading income was also stronger at SGD 285 million compared with SGD 9 million last quarter. Short-term trends aside, our long-term thesis on the narrow-moat-rated bank is unchanged as we believe the bank will continue to benefit from rising economic growth in the region. We continue to see the bank as slightly undervalued, but a narrower discount to our unchanged fair value of SGD 13.60 sees the bank’s rating lowered to 3 stars.

The deployment of deposits accumulated at the end of last year lifted net interest income by 1% against last quarter to SGD 1.53 billion. Loans increased by 1% on last quarter with higher loan growth expected in the second half, mainly in corporates and for the bank’s Indonesia operation. Loan demand was soft in the first quarter in Indonesia as corporates were cautious ahead of the presidential election. Net interest margin was the strongest among peers and was up 4 basis points against last quarter to 1.76%, or 6 basis points against full-year net interest margin of 1.70%.

As previously noted, the bank was slow to reprice its mortgage book. This was due to the portion of the mortgage book that is priced off the interbank rates. Management took a wait-and-see approach in assessing the stability of the interbank rates before raising rates for borrowers. Further repricing in the coming quarters should underpin slight expansion in net interest margin for the full year.

With the stronger result in the first quarter, management took the opportunity to reassess its oil and gas portfolio and assumed lower valuations for the vessels backing its loans. Recent improvement in the oil price has not resulted in an increase in the number of new projects, particularly in deep sea projects. The additional provisioning was for previously identified problem loans, and the rest of the loan portfolio remains prudent. New nonperforming assets were low at SGD 298 million and in line with last year. Provisioning for the oil and gas exposure equates to 7 basis point of total loans. The underlying credit cost should range between 12 and 15 basis points, in line with previous guidance. Our credit cost forecast is adjusted higher in fiscal 2019 to factor in the higher provision, and medium-term assumption is unchanged, as we have assumed a normalisation of credit cost as economic growth moderates.