THE volatility in the financial markets has taken its toll on local bank earnings, with OCBC Bank yesterday reporting a 4 per cent drop in first-quarter net profit to $622 million despite higher divestment gains. The earnings beat analysts' expectations, however.
OCBC's results for the three months to March 31 were hit by a plunge in life assurance profits from its subsidiary Great Eastern Holding, as well as mark-to-market trading losses and lower realised gains on investment securities. For the corresponding quarter last year, OCBC's net profit was $647 million.Basic earnings per share, including divestment gains and tax refunds, was 20.1 cents, down from 21 cents.
A boost for OCBC for the quarter came from a net $156 million gain from divestment of shares in The Straits Trading Company - against net divestment gains of $90 million in the year-ago period. This helped to offset a $41 million fall in tax refund to $6 million. Stripped of divestment gains and tax refund, core net profit was 10 per cent lower at $460 million compared to the year before. But on a sequential basis, the core net profit was 8 per cent higher than the preceding quarter's $425 million.
The quarter's net profit of $622 million beat the $570 million median estimate of seven analysts surveyed by Bloomberg News.
As for writedowns relating to collateralised debt obligations (CDOs), OCBC said its ABS (asset-backed securities) CDO investment portfolio did not require further allowances this quarter. 'The CDO problem is behind us,' said CEO David Conner at a press briefing yesterday. The bank's CDO investments of $250 million had already been written down by 85 per cent last year. Additionally, their corporate CDO investment portfolio of $344 million 'continues to perform', it said, despite the quarter's mark-to-market losses of $16 million for the underlying credit default swaps, which impacted non-interest income.
Operationally, it was a mixed bag as the bank saw growth in its core businesses of net interest income, but a decline in its non-interest income. For the quarter, non-interest income, excluding divestment gains, dropped 26 per cent to $377 million, due to a steep 93 per cent fall in life assurance profits, a key reason being mark-to-market losses for the investments in the non-participating fund.
The bank's derivatives and securities trading also registered a $65 million net loss. The bank said a boost in fee and commission income - driven by growth in investment banking, wealth management, loan-related and trade-related activities - partly helped prop up non-interest income.
Net interest income - or profit from loans - for the quarter grew 26 per cent from a year ago to $638 million. Customer loans hit $75.4 billion, up 19 per cent year-on-year, led by corporate and small and medium enterprise (SME) lending in Singapore, Malaysia and overseas markets, as well as Singapore housing loans. However, Mr Conner noted that the industry loans growth - which has been in the above 20 per cent range - is expected to come down. 'It is bound to taper off,' he said, adding: 'It will come down to a low double-digit range.'
The increase in the bank's loans was mainly to the building and construction, housing, and transport sectors. Interest margins improved from 2.04 per cent a year ago to 2.17 per cent as the cost of funds fell faster than its asset yields.
Expenses increased 21 per cent to $426 million, due largely to the bank's higher salaries and increased headcount. The jump in hirings occurred in the group's overseas markets, including Malaysia, Indonesia and China. Increased business promotion expenses, volume-related brokerage and processing fees also accounted for the swelling expenses.
Mr Conner was cautious about the future, stating 'we are on alert given inflationary pressures and the potential for a further deterioration in the global economy'. He added that the bank's strategy is to pick and choose to lend to industries that are identified to be successful. On the results, he said: 'Our first-quarter core earnings showed resilience in spite of volatile global financial markets.'
OCBC shares ended 2 cents or 0.2 per cent lower yesterday at $9.
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