OCBC Q2 profit falls 40%; 88 per cent of $27b loans under moratorium fully secured, CEO says

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OCBC’s provisions for credit losses swelled to $750 million in the second quarter from $111 million a year earlier.

SINGAPORE – Loans issued by OCBC Bank that are under moratorium amount to $27 billion, slightly less than 10 per cent of its loan book, group chief executive Samuel Tsien disclosed on Friday (Aug 7).

Eighty-eight per cent of such loans across its operating markets such as Singapore, Malaysia and Hong Kong are fully secured, he added, addressing concerns about the uncertainty that banks in the region will face because of Covid-19, especially after relief measures rolled out by governments start to wind down over the next few months.

For Singapore, 6.8 per cent of the bank’s loans are under moratorium, with 96 per cent fully secured.

“(The collateral) therefore gives us comfort that even if the exit from relief programmes will have some challenges along the way because the market may not have fully recovered by that time, we still expect that the primary and secondary sources of repayment… will be able to provide us comfort that the repayment will be available,” he said.

Governments across the region rolled out relief measures, including loan moratoriums, to help businesses cope with the economic fallout due to Covid-19 earlier this year.

The Monetary Authority of Singapore said earlier that it is working with banks to prepare a soft landing for businesses that have taken up its support schemes as relief measures are rolled back by the end of this year. 

Speaking at the bank’s release of its second-quarter results, Mr Tsien said that OCBC, South-east Asia’s second biggest lender, is “managing the exit from the relief programme as much as we can and we are working with regulators all around the world, including Singapore, Malaysia, Indonesia and Hong Kong”.

OCBC’s net profit for the three months to June 30 fell to $730 million, 40 per cent lower from $1.2 billion a year ago, after it set aside “significantly higher allowances against expected credit losses” amid a worsening economy due to Covid-19.

It missed the $930 million average estimate of eight analysts surveyed by Bloomberg.

This brings the bank’s net profit for the first six months of this year to $1.4 billion, 42 per cent lower than $2.5 billion a year ago. 

OCBC shares were trading down 14 cent or 1.6 per cent at 11:39am.

Banks need to defensively shore up their balance sheet and prepare for the slow recovery given that the near-term market outlook is very uncertain due to the ongoing pandemic and rising geopolitical risks, Mr Tsien said.

“This is exactly what we have done since the start of the pandemic crisis,” he added. The bank’s provisions for credit losses surged to $750 million in the second quarter from $111 million a year ago.

The bank’s earnings since March have been hit by business disruptions and slowdown in customer activities as countries implemented measures limiting movements and interactions to curb virus transmissions, an OCBC statement said on Friday.

Profits were also dragged down by “a severe contraction in the global economy, significant financial market volatility and aggressive policy support measures, including sizeable cuts in global interest rates and sharp increases in fiscal spending to drive growth and demand”, OCBC added. 

Mr Tsien said: “Despite the unprecedented size of government and central bank relief programmes extended across the world, business and consumer sentiments continued to be weak.

“The emergence of economies towards the road to recovery will be slow and challenging. We will continue to contain all discretionary expenditure, including management compensation,” he added.

The bank’s net interest margin – a key gauge for bank profitability – fell to 1.68 for the first six months of this year, from 1.78 a year ago. Mr Tsien expects the net interest margin to dip further, but remain in the higher end of the 1.5 range in the second half of the year.

Net interest margin measures the difference between income earned from loans and the interest paid to depositors.

 

 

The board declared a dividend of 15.9 cents per share for the first half of 2020, with the scrip dividend scheme applicable.

Shareholders have the option to receive the dividend in the form of shares, with the issue price of the shares set at a 10 per cent discount.

The move is in line with guidance from the central bank for local banks to moderate their dividends for this year. OCBC paid a dividend of 25 cents per share for the year-ago period.

OCBC’s earnings results round up the release of the three local banks, which had also recorded declines in profits amid an economic slowdown due to the pandemic.

DBS Bank’s net profit for the second quarter fell 22 per cent year on year to $1.2 billion, while United Overseas Bank recorded a 40 per cent drop in net profit to $703 million in the same period, the banks reported on Thursday (Aug 6).

Read the latest on the Covid-19 situation in Singapore and beyond on our dedicated site here.

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