OCBC sees improved outlook on asset quality; Q4 earnings beat expectations

SINGAPORE'S second-largest lender OCBC joined DBS in an improved outlook on asset quality, on the back of an "orderly and very well-managed" exit from Covid-19 relief programmes that is "better than expected", said its top executive on Wednesday.

In its full-year results briefing, outgoing group chief executive Samuel Tsien said that credit costs are expected to come in at the lower end of its two-year projection of between 100 and 130 basis points. With credit costs for FY2020 at 67 basis points, credit costs in 2021 could be half of that and closer to pre-Covid levels.

At the end of January, loans under moratorium make up 2 per cent of total loans, down from 4 per cent at the end of December, which was when most of the moratoriums across OCBC's markets expired. At the end of September 2020, it had been 9 per cent of the bank's loan book.

Mr Tsien noted that the majority of these loans are secured, even for those on moratorium extension, with over 90 per cent are meeting the original repayment schedule.

Even as the unwinding of loan moratoriums is going "smoothly", he cautioned that a strong economic recovery is only expected to take place at the end of this year, to be carried over into 2022.

On Wednesday, OCBC posted a net profit of S$1.13 billion, down 9 per cent from a year ago, on the back of a drop in overall income. Still, earnings exceeded analysts' forecast of S$955.9 million for the quarter, according to a Refinitiv survey of four analysts.

A NEWSLETTER FOR YOU

Friday, 8.30 am

SGSME

Get updates on Singapore's SME community, along with profiles, news and tips.

Sign Up

For the full year of 2020, the lender has proposed a final dividend of 15.9 Singapore cents per share, down from 28 cents in the year-ago period.

Together with an earlier interim dividend of 15.9 cents, this would bring the bank's total dividend for FY2020 to 31.8 cents, which represents a payout ratio of 39 per cent. This is in line with guidance from the Monetary Authority of Singapore (MAS) to cap dividends for FY2020.

A scrip dividend scheme will be applicable to the final dividend with no discount.

For the quarter, total income fell 15 per cent to S$2.49 billion from a year ago, on lower income across all segments.

Net interest margin (NIM), a key gauge of profitability for banks, was down 21 basis points to 1.56 per cent for the quarter, from 1.77 per cent a year ago.

Meanwhile, allowances for the quarter were S$285 million, 37 per cent higher than the S$207 million a year ago.

The bank's non-performing loans ratio was 1.5 per cent as at Dec 31, unchanged from the same period a year ago.

On the issue of dividends, OCBC's chief financial officer Darren Tan said that the bank is awaiting guidance from the MAS, but he hopes that the dividend cap will be lifted "as a way to recognise and reward our shareholders' confidence in us".

Citi analyst Robert Kong wrote in a note that management had indicated during the analyst briefing that any update from regulators on removing the dividend cap will “likely be towards mid-year, ahead of interim 2021 results”.

The bank's common equity tier-one (CET-1) ratio - a signal of a bank's capital strength - rose to 15.2 per cent in December 2020, up from 14.4 per cent the quarter before, mostly due to the impact of the migration to internal ratings-based approach at OCBC Wing Hang Bank.

Mr Kong wrote that OCBC noted that its optimal CET-1 range during normal times is 12.5-13.5 per cent, suggesting the bank is over-capitalised; he noted "that as we are still not in normal times with the recovery visibility still uncertain, it may take some time before the bank returns to its optimal capital range”.

Despite the capital build-up, Mr Tsien maintained that there is no merger and acquisition plan in the works due to limited visibility on its markets.

Management will also have to devote time to manage the integration, which will serve as a distraction, he said.

That being said, if opportunities do arise, the bank will see if it fits into its framework and corporate strategy before deciding. “We will not ignore them,” he added.

For the full year, OCBC's net profit was down 26 per cent to S$3.59 billion on the back of the impact from Covid-19, in particular net interest margins (NIMs), which fell sharply and higher credit loss allowances against deteriorating economic conditions.

Income fell across all segments, with its insurance arm Great Eastern dragging down income on decreased trading income due to lower mark-to-market gains in its investment portfolio and higher insurance contract liabilities resulting from a lower discount rate used to value them, in line with lower market interest rates.

This year, OCBC is targeting mid-single digit loan growth, with NIM to come in between 1.50 to 1.55 per cent, said Mr Tsien.

On the bank's outlook, he noted that there is reduced anxiety around Covid-19, which has improved consumer sentiments.

"While economic conditions have started to show signs of stabilisation and we are seeing increased activities in some pockets of the economy, the recovery is not yet broad-based."

He also cited geopolitical tensions as a factor that could impact the bank’s fortunes in 2021.

Asked by reporters about Myanmar, Mr Tsien said that its exposure to the market is “very insignificant”, with deposits exceeding loans. The bank has 45 people based there, with operations being able to be handled remotely in the event that the team cannot access the office, he said.

He added that the bank does not extend loans if doing so violates regulatory requirements.

This will be the last results briefing helmed by Mr Tsien, who is set to retire on April 14 after 14 years with the bank.

During the briefing, he introduced the incoming group chief Helen Wong, who made a virtual appearance due to social-distancing measures, given that she has just returned from a business trip in Hong Kong. The 59-year-old will be the first woman to head a Singapore bank.

During the briefing, she spoke on OCBC’s Greater Bay strategy, which she said is not going to change even with the unrest in Hong Kong in the past two years. 

In Greater China, Ms Wong said that the bank will continue to focus on the investment, trade and wealth flows, especially that arising from Asean.

“We are looking to strengthen the connectivity between what we call the Greater China and the Asean business corridor, banking on supply-chain transformation, and capturing green and renewable financing that is in real demand from Greater China,” she said.

In FY2020, profit before tax from Greater China rose 11 per cent, making up 31 per cent of overall group profit.

The bank is looking to put in more resources and also set higher targets for its businesses in Greater China, she added.

OCBC shares closed at S$10.85 on Wednesday, up S$0.22 or 2.07 per cent.