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Nikkei Markets

OCBC serves up strong profits with warning notes

Bank cites stress in oil and gas industry, lifts allowances

Singapore's OCBC reported a quarterly net profit rise of 11%. (Photo by Takaki Kashiwabara)

SINGAPORE (Nikkei Markets) -- Oversea-Chinese Banking Corp. joined its two peers in beating estimates of quarterly profit growth, but the bank was cautious about the outlook, citing trade tensions between the U.S. and China that have ratcheted higher and the changes sweeping through the offshore services sector.

Demand for support vessels has not increased despite the recent rise in oil prices, OCBC said, as it made further provisions for loans to oil and gas services companies.

"There is a structural change in this sector, and the oil majors are not investing into deep-sea or even shallow-sea drilling because of alternative energy sources that have become available," CEO Samuel Tsien said at a media briefing after the bank's results.

Companies in the sector will have to restructure and reduce their dependence on offshore exploration and production in order to survive, he added.

As for the worsening trade war between the U.S. and China, Tsien said a resolution would be achieved eventually as that was in both countries' interest. His remarks preceded the higher U.S. tariffs on $200 billion worth of Chinese goods that took effect on Friday. Should the conflict be prolonged, Singapore and Hong Kong will be the Asian economies most affected by the fallout after China, according to Tsien.

Despite slowing economic growth at home and in the region, Singapore's banks got a boost from buoyant financial markets that pushed up earnings from trading and wealth management in the first quarter of 2019. The banks also benefited from a rise in lending margins as loans were renewed at higher rates.

Tsien noted, however, that OCBC's Singapore mortgage loan book shrank compared to a year ago due to weaker sentiment in the housing market, echoing comments by his counterparts at DBS Group Holdings and United Overseas Bank, the city-state's other big local lenders.

DBS last week said its net profit for the quarter ended March rose 9%. At UOB, profit grew 8%.

In the case of OCBC, quarterly net profit rose 11% to 1.23 billion Singapore dollars ($901 million), beating the consensus estimate of S$1.16 billion. Compared to the fourth quarter of 2018, net profit rose by 33%.

Net interest income grew 8% to a new high of S$1.53 billion, lifted by a 5% increase in customer loans and a nine-basis-point gain in net interest margin to 1.76%.

Non-interest income grew 24% as net trading income tripled while profits from life insurance soared 40%.

The group's overall wealth management-related income, comprising income from insurance, private banking, asset management, stockbroking and other products, rose 27% from a year ago to S$921 million and accounted for 34% of total income.

OCBC said net new money inflows and improved asset valuations drove the assets under management of Bank of Singapore, its private banking arm, to a new high of S$146 billion.

OCBC also lifted allowances for impaired loans nearly 18 times to S$231 million from S$13 million a year earlier. The bulk of the allowances were for loans to the oil and gas services sector that were already classified as non-performing.

"A prudent decision was made to substantially reduce collateral valuations further," to the extent of writing down idle vessels to scrap value, OCBC said in a statement.

--Kevin Lim

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