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Singapore's Oversea-Chinese Banking profit up 5%; bad debts swell

SINGAPORE -- Oversea-Chinese Banking Corp., Singapore's second-largest bank by assets, said Thursday its net profit rose 5% on the year to 943 million Singapore dollars ($677 million) for the third quarter ending in September.

Despite a drop in the bank's net interest margin and higher provisions for bad loans, its bottom line was lifted by better performance in its wealth-management business and its Indonesian unit.

Net interest income for the quarter dropped 6% to S$1.23 billion, pressured by weak loan demand and a thinner net interest margin, which fell to 1.62% from 1.66% a year earlier. Loan volume was down 2% on year at S$208.6 billion, mainly due to weaker trade-related lending to greater China.

Noninterest income grew 25% to S$970 million. The bank's wealth-management business accounted for 28% of income, with its fee income hitting a record-high S$155 million. The Indonesian unit's contribution to overall net profit grew 34% on year to S$36 million.

While the financial results for the quarter beat analysts' expectations, OCBC maintained a cautious outlook on the regional economy. "The market environment continues to be difficult," said CEO Samuel Tsien at a news conference Thursday morning.

OCBC's asset quality is also showing signs of deterioration. It had S$2.47 billion of nonperforming loans as of September, up from S$1.86 billion a year ago. That pushed the bad loan ratio up to 1.2% from 0.9% during the same period a year earlier. The bank booked S$421 million in loan-loss provisions and impairments in the first nine months of the year, up 43% from S$294 million for the same period in 2015.

The main culprit is the ailing oil and gas exploration sector, which makes up around 6% of OCBC's loans. The industry made up around one-third of specific allowances booked in the third quarter. "I don't think the oil and gas sector is in a recovery mode yet," said Tsien.

Earlier this month, Fitch Ratings released a report on the impact of oil- and gas-related defaults on Singaporean banks. While the report concluded the city-state's banks are "well-placed to withstand potential losses," it said the weighted-average nonperforming loan ratio for the three biggest banks -- DBS Group Holdings, OCBC and United Overseas Bank -- is expected to rise as more bad loans emerge from the sector.

As the city-state's economy suffers the side effects of weak global trade demand stemming from a slowdown in China, Tsien said Singapore's consumer-oriented sectors, such as retail and food and beverage services, may also come under pressure.

The bank expects loan growth for the full year and 2017 to be in the "low single digits." To compensate for the weak domestic economy, OCBC plans to use its international franchise to provide capital for businesses expanding in Southeast Asia and China. Tsien said OCBC's ability to compete against its peers is "strengthened rather than weakened" when the domestic economy is sluggish, as it can service more companies venturing overseas for growth.

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