OCBC swallows bitter pill on offshore sector

Singapore

OCBC took a knife to its offshore support vessels exposure, providing in full against bad loans for what Citi Research calls a "legacy book", and crunching its exposure down to negligible levels.

The bank's Q2 net profit fell by a larger-than-expected 40 per cent after it took S$350 million in provisions to write down the carrying value of the existing offshore support vessels (OSVs) that back corresponding impaired loans. It also joined its local peers in bumping up overall allowances to buffer against bad loans to emerge amid the pandemic-fuelled crisis.

Net profit for the three months ended June 30 stood at S$730 million, compared with S$1.22 billion a year earlier, underperforming the S$930 million average estimate of eight analysts polled by Bloomberg.

Allowances for the second quarter surged to S$750 million, compared with S$111 million a year go. It was also higher as compared with S$657 million in allowances posted in the previous quarter.

The bank in Q2 "took the opportunity" to write down the carrying value of the existing OSVs that back corresponding non-performing loans (NPLs) - even as the portfolio performed "at the same level" as the previous quarter - amid a grim outlook of the sector, OCBC CEO Samuel Tsien told reporters on Friday.

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Consequently, the bank's OSV portfolio, excluding conglomerates, is now down to less than 0.3 per cent of total outstanding loans. "We believe that the demand for offshore support vessels will come down quite significantly for a period of time. We don't know when the market is going to pick up, because we don't know when all the markets will open up,' said Mr Tsien.

He noted that the transport sector - hard-hit by travel restrictions - is a "fairly important" source of demand for the oil industry. It was estimated that demand for fuel from the transport sector fell by 35 per cent during lockdowns.

In a report on Friday, Citi analyst Robert Kong said OCBC is "taking care of the past and caution on the future", noting that the bank is ahead of its provisions guidance with over 50 per cent of base-case in H1 2020, having also "completely provided for its legacy OSV book".

As a result, Citi projected for credit costs to pull back to around 40 basis points (bps) annualised over the next six quarters and a cumulative 115 bps. OCBC had guided for 100-130 bps, which translates to about S$3 billion to S$4 billion in provisions through to 2021.

Total allowances for H1 2020 jumped to S$1.4 billion, compared with S$360 million in the year-ago period. Some S$793 million were largely for specific provisions for a Singapore-based corporate customer in the oil trading sector recognised in the first quarter, and further provisions made in the second quarter for the OSV portfolio.

General provisions made up the remaining S$614 million of H1 allowances, which include S$300 million of management overlays and macroeconomic variables adjustments of S$197 million.

OCBC declared an interim dividend of 15.9 Singapore cents per share, down from 25 cents per share declared in the year-ago period. The scrip dividend scheme will be applicable to the interim dividend, with the issue price of the shares set at a 10 per cent discount.

The payout represents half of the maximum 31.8 cents dividend per share that can be paid out in 2020, representing 60 per cent of 2019's 53 cents per share. This is in line with the regulator's call to cap dividends.

OCBC factored in a peak NPL ratio of 2.5-3.5 per cent through to 2021 as government relief measures begin to taper off towards the end of this year. NPL ratio for Q2 ticked higher to 1.6 per cent, up from 1.5 per cent in both a year ago, and quarter ago.

OCBC's moratorium relief amounted to S$27 billion, or 10 per cent of its total loan book. About 6.8 per cent of total loans in Singapore have hit pause on repayments; and 59 per cent in Malaysia due to the automatic moratorium scheme.

While the bank's total loans under moratorium is below Citi's guidance of 15 per cent, Mr Kong cautioned the impending halt of support measures. The expiration of moratoriums in Malaysia from Oct 20 "would be the test as to how large NPLs would be".

Mr Tsien said it is difficult to estimate how many borrowings under debt holiday will sour into bad loans when repayments resume.

"There is quite a bit of uncertainty on how the relief programme is going to be managed, how fast can markets open up, and whether economic activity is able to pick up."

That being said, around 88 per cent of OCBC's loans under moratorium are fully secured. "Even if the exit from the relief programme will see some challenges because the market may not have fully recovered by that time, we still expect that the primary and secondary source of repayment from collaterals will be able to provide us comfort that repayments will be available."

OCBC's net interest income for the second quarter fell 7 per cent from the year-ago period to S$1.48 billion, as asset growth was more than offset by margin compression.

Net interest margin (NIM) stood at 1.6 per cent - the lowest in its history - falling 16 bps from the quarter ago. A year ago, NIM was 1.79 per cent.

OCBC guided for NIM to maintain at the "high 1.5 per cent range" for the second half of 2020. "The magnitude of downward adjustment will not be as high as what we saw in the second quarter, versus the first quarter," said Mr Tsien.

Non-interest income in the second quarter rose 11 per cent from a year ago to S$1.14 billion, on increased trading and insurance income. Operating expenses fell 4 per cent from the year-ago period to S$1.11 billion.

Annualised return on equity was 6.1 per cent in H1 2020, as compared with 11.7 per cent a year ago. Its CET1 ratio was 14.2 per cent.

OCBC guided for outlook to be fairly muted for H2 2020. Depending on the containment of the virus and the development of vaccines, economies may gradually reopen from 2021, said Mr Tsien.

"And because liquidity in market is still significantly ample, maybe too much, it is going to generate economic activities for us to grow."

The bank counts supply chain shifts, wealth management and sustainable finance as some of the key drivers of future growth.

Shares of OCBC closed on Friday eight cents lower at S$8.72.

READ MORE: With reliefs yet to unwind, Singapore banks sit uneasy about final impact of Covid-19