OCBC Bank drew a line under the blight of sub-prime problems in the United States yesterday with assurances that the worst is over.
The bank told a results briefing that the relatively small additional allowance it made in the fourth quarter should be the end of any red ink related to the US mortgage meltdown.
OCBC chief financial officer Soon Tit Koon said: 'There will be immaterial impact going forward' for write-downs related to asset-backed collateralised debt obligations (CDOs). Some of the securities are linked to the US sub-prime crisis. The bank made additional allowances of $10 million in its fourth quarter for CDOs - a fraction of the $221 million charge it took in the third quarter.
The assurance came on a day when OCBC posted a 16 per cent drop in core profit, but one that still beat market expectations.
Core net profit, which excludes exceptional items, for the three months ended Dec 31 last year was $425 million, slightly below the $432 million recorded a year ago. But the result surpassed the $397 million fourth-quarter average forecast of 15 analysts polled by Reuters Estimates, who had predicted net profits of $2.04 billion for last year.
Full-year net profit was $2.07 billion, up from $2 billion a year ago, thanks to robust loans growth, insurance and fee-based activities. This meant that full- year core earnings per share surged 32 per cent to 59.7 cents - OCBC's 'best performance since 1999', said OCBC chief executive David Conner.
Net asset value was $4.79 compared with $4.07 in 2006.
Investors greeted the news of the planned final tax-exempt dividend of 14 cents per share by pushing the shares up 15 cents to $7.60 yesterday. The full-year dividend will be 28 cents a share, up from 23 cents a year ago.
Shareholders can opt to take their dividends in cash or invest them in securities that pay a 'reasonable interest rate' coupon and can be converted into shares later at a fixed price.
These are called subordinated notes. Holders of subordinated debt only get paid interest after other creditors like bondholders are paid in full.
The proposed scheme will help replace more expensive capital with cheaper debt held in its Tier II capital. If all shareholders subscribe to the note, OCBC may end up issuing up to $432 million in convertible notes.
Morgan Stanley analyst Matthew Wilson noted: 'Luring retail investors into Tier II capital with a dividend funding scheme is a clever way to attempt to raise cheap Tier II capital. If they went direct to wholesale markets, raising capital may be more expensive.'
OCBC's fourth-quarter performance took a hit from higher expenses, which rose 14 per cent during the period. The bank forked out higher salaries, business promotion expenses and professional fees. Meanwhile, net interest income rose 9 per cent from the third quarter on the back of 7 per cent loans growth. OCBC raised net interest margins by 0.07 of a percentage point.
Mr Conner said he does not expect a mortgage price war to erupt in Singapore despite the plummeting Singapore inter- bank interest rates. He noted that there is still 'reasonably healthy demand for home loans' and the interest rate spreads are still not wide enough for most banks to start cutting rates.
He added that the bank continues to deepen its penetration of overseas markets such as Indonesia and Malaysia and is looking for opportunities in Vietnam, where it will raise its stake in local lender VP Bank to 15 per cent from 10 per cent currently.
It is exploring the possibility of getting a license for a wholly- owned locally incorporated unit in Vietnam, while its asset management unit Lion Capital is also eyeing the market, he said.
A SOLID GUY IN THE NEW CEO
'I trained him... He was my subordinate for 5-1/2 years. He is a good banker, a solid guy. What can I say? We were both born in the Year of the Rat, so we must have some great characteristics.'
MR CONNER, on new DBS chief executive Richard Stanley. Mr Stanley worked at Citigroup Singapore as head of the financial institutions and securities division from 1990 to 1995. His boss was Mr Conner, who was then Singapore country head for Citigroup.
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