OCBC to re-price mortgages for gradual margin lift

Q2 earnings beat forecasts, rising 16 per cent to S$1.21 billion as net interest income rose 8 per cent to S$1.45 billion

Tue, Aug 07, 2018

OCBC expects to re-price parts of its Singapore mortgage book in the second half of the year, a move that should lift its net interest margin (NIM) gradually. This comes as its expansion in NIM in the second quarter was smaller than its two banking peers.

Rate movements are in particular focus this season, as analysts have been bullish on banks on hopes that lenders can make a bigger margin during this period of rate normalisation.

Banks expand margins in general by enlarging the spread they make off their loans by more than the interest to be paid by the banks on customer deposits and wholesale funding.

OCBC reported on Monday a 16 per cent increase in net profit for the second quarter. Net profit for three months ended June 30, 2018 stood at S$1.21 billion, up from S$1.04 billion a year ago. The results beat the S$1.12 billion consensus forecast in a Bloomberg survey of four analysts.

The results translated to annualised earnings per share of S$1.15, up from 98.4 Singapore cents.

Shares of OCBC closed on Monday at S$11.58, up 23 Singapore cents or 2.03 per cent.

Net interest income in the second quarter rose 8 per cent from a year ago to S$1.45 billion, with gross loans up 10 per cent and NIM expanding just two basis points (bps) to 1.67 per cent from 1.65 per cent a year ago.

By comparison, the NIM of DBS's loanbook expanded by 11 bps from a year ago; that of UOB rose by 8 bps.

OCBC chief Samuel Tsien said this was due to weaker NIM figures out of Hong Kong and Indonesia, even as NIMs rose in Singapore and Malaysia.

To be sure, Mr Tsien added that the bank also booked a healthy increase in trade loans, which accounted for 30 per cent of the increase in all loans from a quarter ago. Trade loans typically have a tighter NIM than other commercial loans.

From now to the end of the year, the bank will look to re-price mortgages where the all-in rate is below the Sibor (Singapore Interbank Offered Rate), with Mr Tsien saying that the bank did not push "abrupt" re-pricing on its customers.

As at end-June, just over a quarter of OCBC's customer loans are made up of housing loans, with the bulk of the mortgages booked in Singapore.

For OCBC, a portion of its loans in Hong Kong are tied to prime rates which have not risen in tandem with the broader increase in rates amid a rate normalisation period.

Mr Tsien said the bank is working on increasing its current account, savings account (CASA) balances - which typically represent lower cost of funding - in Hong Kong through its Wing Hang business. Mr Tsien noted that the bank has seen a steady increase in the amount of CASA at OCBC Wing Hang, with CASA now making up 37 per cent of all deposits.

This CASA ratio is up from under-30 per cent at the time of acquiring Wing Hang in 2014. The bank is targeting for the ratio to hit close to 50 per cent, said Mr Tsien, without specifying a timeline.

OCBC's Indonesia unit also posted weaker NIM on its loans, as the re-pricing of assets had yet to catch up with higher funding costs.

Non-interest income in the second quarter rose 2 per cent from a year ago to S$1.02 billion, driven by among other things wealth management and fee income.

Profit from life assurance was S$191 million against S$195 million a year ago. Great Eastern Holdings' new business embedded value was up 8 per cent to S$140 million.

The net profit was also boosted by a significant fall in allowances, with total allowances at S$21 million, compared to the year-ago allowances of S$169 million which reflected stresses in the oil-and-gas portfolio that are "behind us", said Mr Tsien.

Operating expenses increased 4 per cent over the year to S$1.04 billion, reflecting higher staff and technology-related expenses. It was flat over the quarter, with its cost-to-income ratio in the second quarter at 41.9 per cent.

The bank also declared an interim dividend of 20 Singapore cents per share for the first half, two cents higher than the 18 cents interim dividend declared a year ago.

Unlike DBS and UOB, OCBC is offering scrip dividend this round. With this, shareholders can choose to receive the dividend in shares priced at a 10 per cent discount to the average of the daily volume-weighted average prices from Aug 15 to 17, 2018.

The bank said it is sticking with its guidance of a 40-50 per cent dividend payout ratio, calling it sustainable and predictable for its shareholders. Said its chief financial officer Darren Tan: "We have a general bias not to utilise a special dividend."