Two More Slow Quarters For OCBC Ahead, Says CEO

Source : The Straits Times, May 8, 2008

Bank's first-quarter net profit falls 4% to $622m, but still beats analysts' estimates

OCBC Bank has now suffered two straight quarters of sliding profits and may well have to endure more tough times ahead, the bank's chief executive, Mr David Conner, warned yesterday.

'We've had two quarters of very low growth. Can it happen for two more quarters? Yes,' Mr Conner told reporters at a briefing for OCBC's first-quarter results.

Betting on oil, construction: To shore up its finances, OCBC Bank is setting its sights on businesses that are going to be successful despite the difficult times ahead, said chief executive David Conner. These include 'anything that's oil-related' and construction, which is not restricted to developers but extends to 'guys who move dirt', he added.

The reason, he said, was the economic slowdown in the United States. 'It's probably going to be fairly prolonged, perhaps not too deep, but lasting several quarters,' said Mr Conner.

Still, OCBC beat expectations with a net profit of $622 million for the first quarter ended March 31, down 4 per cent from a year earlier. The figure included a $156 million one-time gain from the sale of a stake in The Straits Trading Company.

The result easily beat the $570 million median estimate of seven analysts Bloomberg surveyed.

In the first quarter, OCBC incurred losses of $65 million in securities and derivatives trading. Insurance unit Great Eastern Holdings also suffered a 93 per cent drop in life assurance profits to $7 million.

Mr Conner called the massive drop in life assurance profits 'a very unusual situation' caused by fast-widening credit spreads that peaked this quarter.

This led to mark-to-market losses for investments in Great Eastern's non-participating fund, which eroded earnings from impressive loans growth at OCBC.

The bank, South-east Asia's third-largest lender, saw a 19 per cent rise in loans to corporations and small and medium-sized enterprises, particularly in the building and construction sector.

Mr Conner said that although this figure was 'very robust, it's bound to taper off'.

In the future, he said, OCBC would 'pick and choose to lend to the industry and the players within each industry that we think are going to be successful, even if there are difficult times ahead'.

These include 'anything that's oil-related' and construction, which is not restricted to developers but extends to 'guys who move dirt', he added.

OCBC is also prepared to offer loans to homebuyers on residual deferred payment purchases, even though the popular scheme was scrapped in October last year, leaving buyers of uncompleted homes to make progressive payments rather than delaying the bulk of their payments.

'I don't think real estate has collapsed, nor do I think it will collapse,' said Mr Conner.

He added: 'Rental demand is so strong, and the reality is, most people who purchased on deferred payments will take delivery, and there will be financing opportunities for us.'

Volatile financial markets resulted in a fall in overall non-interest income by 26 per cent to $377 million.

Net interest income grew 26 per cent to $638 million in the first quarter. Net interest margin rose to 2.17 per cent, up from 2.03 per cent in the corresponding period last year.

Annualised earnings per share for the first quarter fell to 58.7 cents from 66 cents a year ago.

OCBC said the value of its collateralised debt obligation (CDO) portfolio of $250 million as at March 31, which had been written down by 85 per cent last year, did not require further allowances in the first quarter.

However, non-interest income was hit by a $16 million mark-to- market loss on its corporate CDO investment portfolio.