OCBC Profit Rises Less Than Estimated on Bad-Loan Provisions

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Oversea-Chinese Banking Corp.’s fourth-quarter profit missed estimates as a trading slump and bad-loan provisions shaded gains in lending profitability.

Net income climbed 11 percent from a year earlier to S$791 million ($584 million) in the three months ended Dec. 31, the Singaporean bank said in a statement Wednesday. That missed the S$883 million average estimate of four analysts surveyed.

Southeast Asia’s second-largest lender followed DBS Group Holdings Ltd. in posting lower trading income and rising provisions for soured loans amid slowing growth in Singapore and abroad. Chief Executive Officer Samuel Tsien led OCBC through last year’s $5 billion purchase of Wing Hang Bank Ltd. in Hong Kong as the bank sought to expand outside of its home market.

“OCBC’s results look almost a direct mirror to DBS,” Lachlan Colquhoun, chief executive officer at research firm East & Partners Asia, said today by phone from Hong Kong. “2015 is going to be a difficult year and other banks may reflect this. If any banks can withstand difficult waters, it’s DBS and OCBC with their strong balance sheets.”

Net interest income rose 24 percent in the quarter from a year earlier to S$1.28 billion as the bank’s net interest margin widened, the report showed. Operating expenses swelled 29 percent to S$922 million.

Bad Loans

Net allowances for loans and other assets more than doubled to S$154 million, mostly on rising bad debts in Malaysia and Singapore, OCBC said. Net trading income slid 74 percent to $18 million.

Shares of OCBC dropped 0.3 percent to S$10.57 at 1:38 p.m. in Singapore, paring this year’s gain to 1 percent. That compares with the benchmark Straits Times Index’s 2.3 percent increase. The bank advanced 5.5 percent in 2014 for a third consecutive annual gain.

Loans to customers rose 24 percent from a year earlier to S$210 billion as of December, the bank said. Net interest margin, a measure of lending profitability, increased 3 basis points in the 12 months to 1.67 percent. Loan growth this year will be “high single-digit,” Tsien said at a news briefing.

“The credit environment is going to be, generally speaking, tougher than what we’ve seen in the past,” the CEO said. OCBC will remain cautious on sectors with overcapacity including steel and shipbuilding, he said.

Higher Rates

Banks have been aided by an increase in short-term interest rates. The three-month Singapore interbank offered rate has climbed to the highest levels since January 2010, driven by a stronger U.S. dollar and new bank liquidity requirements. About 40 percent of local lenders’ Singapore-dollar loans are priced based on Sibor, according to a Feb. 6 Phillip Capital report.

OCBC began accounting for Wing Hang in its earnings in July. The Hong Kong unit contributed after-tax profit of HK$495 million ($64 million) to the group in the year ended Dec. 31 following merger-related adjustments.

Greater China contributed to 12 percent of OCBC’s pretax profit in 2014, greater than 6 percent the year before, Tsien said. The region has high potential to match the 19 percent contribution from Malaysia, he said. Singapore will remain the largest income provider to the bank, with its share likely to stay above 50 percent, he said.

OCBC, its insurance arm and the bank’s founding Lee family are in talks to sell their combined 34.1 percent stake in United Engineers Ltd. to TCC Top Enterprise Ltd., controlled by Thai billionaire Charoen Sirivadhanabhakdi.

Selling the stake in the engineering and property development company would bolster OCBC’s capital after its Wing Hang takeover. The parties are in exclusive negotiations under an agreement that expires Feb. 13.

While the bank doesn’t plan to hold on to its non-core assets forever, it’s not under any time pressure to sell them, Tsien said.

(Adds CEO Tsien’s comment from eighth paragraph.)
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