Oversea-Chinese Banking Profit Climbs 15% on Loan Growth

Oversea-Chinese Banking Corp., Southeast Asia’s second-largest bank by assets, said second-quarter earnings climbed 15 percent as loan growth and fee income outweighed a decline in lending profitability.

Net income rose to S$577 million ($479 million) in the three months ended June 30 from S$503 million a year earlier, the Singapore-based bank said in a statement to the stock exchange today. That was less than the S$603 million average of eight estimates compiled by Bloomberg.

Singapore banks are tapping credit demand to make up for the narrowest loan margins in Southeast Asia. The city’s loan growth accelerated in June to the fastest pace in at least 12 years. Last week, bigger rival DBS Group Holdings Ltd. reported earnings that missed analysts’ estimates as low borrowing costs weighed on lending income and the economy shrank in the quarter.

“Loan growth is strong, asset quality is not an issue, fee income outlook so far has been good,” said Wee Siang Ng, a banking analyst at BNP Paribas SA in Singapore, reiterating his “buy” rating on the stock. “The only pressure point is interest margins, but that too seems to be bottoming out.”

Shares of Oversea-Chinese Banking fell 1.1 percent to S$9.77 at 10:01 a.m. in Singapore. They have lost 1.1 percent this year, compared with gains of 5.7 percent for DBS and 12 percent for Singapore-based United Overseas Bank Ltd.

Great Eastern

The bank’s earnings missed analysts’ expectations because its insurance subsidiary posted a decline in quarter-on-quarter profit, said Ng. Great Eastern Holdings Ltd., 87 percent owned by Oversea-Chinese Banking, reported a 26 percent drop in net income from the previous quarter yesterday.

“Great Eastern has always been a wild card whose earnings performance is dependent on the direction of the capital markets,” Ng said.

Loans expanded 27 percent last quarter from a year earlier, fueled by demand from businesses, today’s statement showed. Fee income climbed 20 percent, led by earnings from trade and wealth management.

The net interest margin narrowed to 1.87 percent from 1.96 percent a year earlier. The bank attributed the decline to low interest rates, growth in lower-yielding loans linked to trade, and price competition, particularly for mortgages.

Smaller Interest Margins

Singapore’s banks had an average net interest margin of 1.94 percent for 2010, according to estimates from Credit Suisse Group AG. That compared with 2.79 percent for lenders in Malaysia, 3.1 percent for Thailand and 6.36 percent for Indonesia, analysts led by Anand Swaminathan in Singapore said in a July 19 note to clients.

Loan growth in Singapore climbed to 26 percent in June, the fastest pace in at least 12 years, according to data compiled by the Monetary Authority of Singapore.

DBS said last week that its loan margin contracted to 1.8 percent from 1.84 percent a year earlier. Southeast Asia’s largest lender reported net income of S$735 million for the quarter, compared with a loss of S$300 million a year earlier when it booked a one-time charge at its Hong Kong unit.

Singapore’s gross domestic product fell an annualized 7.8 percent in the second quarter from the previous three months, when it climbed 27.2 percent. The Monetary Authority of Singapore forecasts the economy will expand 5 percent to 7 percent this year.

“Our investments are continuing to bear fruit, underpinned by favorable economic conditions in our key markets,” Chief Executive Officer David Conner said in the statement. “While we are cognizant of inflationary risks, as well as possible negative implications of fiscal issues in the U.S. and Europe on global markets, we will continue to focus on expanding our regional franchise for further growth.”

The bank’s overseas business accounted for 44 percent of profit before income tax, compared with 37 percent a year earlier.

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