OCBC's Profits Slip A Third To $532m But Beats Forecast

Source : The Straits Times, Thu, Aug 09, 2007

OCBC Bank's net profit fell 33 per cent, as better-than-expected growth in loans and fee income was masked by an absence of one-off gains that boosted the bottom line last year.

Earnings for the second quarter ended June 30 clocked in at $532 million, beating a median estimate of $476 million by eight analysts polled by Bloomberg News.

This was down from last year's $795 million, which had included $482 million of divestment gains from the sale of shares in retailer Robinson & Co and other investments.

Excluding such exceptional items, OCBC's operating numbers were impressive. Core earnings surged 65 per cent to $518 million, buoyed by a 28 per cent hike in net interest income and a 50 per cent jump in non-interest income.

This puts it at the top of the class in a local banking field which has scored well overall in the quarter, analysts said. DBS Bank last week reported a 21 per cent gain in earnings, while United Overseas Bank (UOB) posted a 32 per cent bottom-line rise.

'OCBC has been the only one to show a big improvement in net interest margins, which is a surprise considering how the other two banks fared,' said Daiwa Institute of Research analyst David Lum. 'It looks like the source of improvement came from a big drop in their funding costs.'

Banks fund the loans they give either by taking deposits or borrowing from other banks.

OCBC chief financial officer Soon Tit Koon said the bank enjoyed lower funding costs in Singapore and Malaysia due to lower interest rates and a higher proportion of savings and current account deposits.

Indeed, OCBC's net interest margin rose 0.13 percentage point to 2.13 per cent, the biggest improvement among the local banks. At the same time, its loans book expanded 12 per cent to $65.3 billion, driven mainly by corporate lending, especially in building and construction.

But lending to home buyers was flat, and this partly explained why the bank lagged behind the 18 per cent increase in UOB's loans book and the 19 per cent increase at DBS.

OCBC chief executive David Conner said the bank, which leads the market in HDB loans, is very much in the market, and has been increasing its sales force. Loan approvals in the quarter was up 75 per cent.

Non-interest income of $493 million was boosted by big gains in stockbroking commissions, wealth management fees and investment banking, which offset a 50 per cent fall in foreign exchange income. Life insurance profits almost doubled to $123 million, helped largely by strong contributions from insurance subsidiary Great Eastern Holdings.

On collateralised debt obligations (CDOs), Mr Conner said the bank has marked down its portfolio by US$33 million (S$49.7 million) due to low liquidity for the financial instrument that is at the centre of the United States mortgage crisis.

He, however, reiterated that there have been no losses or rating downgrades so far and the CDO investments, in any case, are too small relatively to significantly hurt OCBC's earnings.

Second-quarter earnings per share were 66.1 cents, up from 39.2 cents. Net asset value per share, before valuation surplus, was $4.39, up from $3.84. An interim dividend of 14 cents a share has been declared.

OCBC shares closed 30 cents up yesterday at $8.70.