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(SINGAPORE) OCBC Bank's net profit rose 10 per cent to $466 million in the second quarter from a year earlier, beating analysts' estimates as the group benefited from sharply higher profits at its insurance unit Great Eastern and set aside less than expected for bad loans.
OCBC chief executive David Conner sounded cautiously upbeat, saying that 'there is growing consensus that the worst is over for the global economy and global financial markets', but adding that 'the pace of recovery remains uncertain'.
OCBC, which owns 87.1 per cent of Great Eastern, also said that it expects to take a pre-tax hit of $218 million to its third-quarter results from the insurer's offer to buy back at full value $594 million worth of structured investment products that it sold to policyholders.
OCBC's share price ended 0.3 per cent lower at $7.80 yesterday.
'It's better than I expected,' said Pauline Lee, an analyst at Kim Eng Securities, on OCBC's results. 'The major surprise came mainly from lower provisions, and the good trading gains and insurance income.'
The bank took a $104 million charge for bad loans and other assets in Q2, compared to $197 million in the previous quarter and $55 million a year earlier.
At $466 million, OCBC's Q2 net profit was 15 per cent lower than the $545 million in Q1, but that period included a one-time boost of $175 million from Great Eastern's business in Malaysia due to the introduction of new capital rules there.
Analysts surveyed by both Reuters and Bloomberg had forecast an average of $356 million in Q2 net profit for OCBC.
Its earnings per share of 13.5 cents for the three months to end-June was higher than the 13.1 cents a year earlier, but fell compared to the first quarter's 17.6 cents.
For the first six months of the year, net profit dipped 3 per cent from a year earlier to $1.01 billion. OCBC said that it would pay an interim dividend of 14 cents per share, unchanged from a year earlier.
Excluding Great Eastern's results, OCBC's Q2 net profit was $390 million - down 7 per cent from a year earlier but 12 per cent higher than in the first quarter.
The group's non-interest income rose 30 per cent to $494 million from a year earlier, boosted by a jump in profit contributed by Great Eastern and higher trading gains.
Net interest income from the bank's main lending business, however, was 'quite a disappointment', said Kim Eng's Ms Lee. 'In terms of the lending business, it still looks challenging.'
OCBC's net interest income rose just 5 per cent from a year earlier to $710 million. Compared to the previous quarter, it fell 4 per cent, as loan volume shrank and net interest margins narrowed, which meant the loans were less profitable for the bank.
Net customer loans after deducting allowances for bad loans fell 1.5 per cent over the quarter to $77.6 billion at the end of June, the third straight quarterly decline. Over the year to end-June, loans rose just 0.8 per cent.
The decline was mainly due to corporate customers repaying their debt, OCBC said. At many businesses, demand for new borrowing has dropped 'because there have not been significant opportunities for expansion', said Samuel Tsien, OCBC's global head of corporate banking.
Mr Conner added: 'We're open for business and we're banking everything that we think is appropriate, but we don't think that this is an appropriate time to be pushing aggressively for loan growth.'
The bank approved twice as many home loan applications in Q2 compared to Q1, Mr Conner said, although the new loans will only be drawn down over the next two to three years as recently launched housing projects are completed.
The proportion of non-performing loans (NPLs) held by OCBC rose further to 2.1 per cent as at end-June, from 1.8 per cent at end-March and 1.4 per cent a year earlier.
Total NPLs rose 14 per cent over the quarter to $1.63 billion at June 30. Most of the increase was from Singapore, mainly loans to the manufacturing and transport sectors, OCBC said. But the inflow of new NPLs has slowed compared to the first quarter, it added.
CIMB analyst Kenneth Ng said that he expected NPLs - which tend to rise with a lag after the economy slips into recession - to climb further, but added that the current levels weren't a major worry.
'NPLs are still going up but not at an accelerating rate. I think the lower provisions clearly suggest that the bank is not expecting the credit cycle to be anything like it was in the Asian financial crisis.'
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