(Bloomberg) -- Oversea-Chinese Banking Corp.’s profit fell more than analysts anticipated in the second quarter as it joined its Singapore peers in setting aside higher provisions for loan losses during the pandemic.
Net income dropped 40% from a year earlier to S$730 million ($533 million) in the three months ended June 30, Southeast Asia’s second-largest bank by assets said Friday. That missed the S$930 million average estimate of eight analysts surveyed by Bloomberg.
Similar to its local rivals, OCBC built hefty buffers before the expiry of government relief measures leaves businesses more vulnerable to the global economic downturn. The lenders also suffered from a squeeze in lending profitability stemming from falling interest rates.
Still, Chief Executive Officer Samuel Tsien joined his counterparts at DBS Group Holdings Ltd. and United Overseas Bank Ltd. in maintaining credit-cost estimates for the two years through 2021, signaling Singapore’s major banks expect to ride through the nation’s worst recession.
“Much uncertainty persists on both the economic front and human cost arising from the pandemic,” Tsien said in a presentation. “It is important for banks to defensively shore up their balance sheet and prepare for the slow recovery.”
Ample capital buffers and a growing wealth business will limit downside risks for earnings at Singapore banks including OCBC, Krishna Guha, a senior analyst at Jefferies, wrote in a note. Still, factors including narrowing lending margins, reliance on volatile trading income, and capped dividends means there are few “upside catalysts,” he added.
Shares Fall
Shares of OCBC fell 1.9% at 11:59 a.m. in Singapore, taking this year’s decline to 21%.
Total allowances jumped to S$750 million, from S$111 million a year ago. Part of them were to write down s of non-performing loans to offshore support vessels in the oil industry, given the sector’s “poor outlook,” the bank said.
The bank kept its credit-cost estimate of 100-130 basis points through the end of next year, expecting a gross non-performing loans ratio at 2.5%-3.5%, including the impact from the expiry of government support programs.
About 10% of the bank’s loans are subject to a moratorium on repayments, and 88% of those are fully secured, Tsien said.
“We are managing the exit from the relief program as much as we can,” including working with regulators in Southeast Asia and elsewhere, he said at a briefing. “Hopefully that will be able to help the transition without significant costs to the economy.”
Key Highlights
- OCBC’s net interest margin fell to 1.6% from 1.76% three months earlier.
- Net interest income declined 6.6% from a year earlier.
- Provisions for impaired assets stood at S$518 million.
- Assets under management at Bank of Singapore, its private bank, rose to $113 billion from $111 billion a year ago.
- Non-interest income increased 11%, driven by trading and insurance business.
©2020 Bloomberg L.P.
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