United Overseas Bank Ltd (SGX: U11), or UOB, was the first of the trio of local banks to report its fiscal 2023’s first quarter (1Q 2023) results back in late April.
The lender saw its net profit hit a record high of S$1.6 billion.
Similarly, DBS Group (SGX: D05) then followed up with its own stellar set of earnings, posting a record net profit of S$2.57 billion.
Now, OCBC Ltd (SGX: O39) has joined both its peers in also reporting a splendid set of 1Q 2023 earnings.
All three banks are benefitting from a sharp surge in interest rates caused by the US Federal Reserve’s rapid rate hikes to combat inflation.
Here are five highlights from OCBC’s latest earnings report.
1. A solid set of financial numbers
OCBC’s net interest income surged by 56% year on year to S$2.34 billion, driven by a sharp jump in the bank’s net interest income (NIM).
Non-interest income, however, dipped by 11% year on year to S$1 billion.
Despite the drop, the bank’s total income rose 27% year on year to S$3.35 billion.
Operating expenses increased by just 3% year on year, resulting in operating profit before allowances soaring 46% year on year to S$2.1 billion.
As a prudent measure, OCBC more than quadrupled its allowances for non-impaired assets from S$13 million to S$54 million.
As a result, net profit increased by 39% year on year to S$1.88 billion, a record-high for the group.
2. Lower overall fee income
Moving on to the bank’s non-interest (or fee) income, the 11% year-on-year fall can be attributed mainly to a fall in income from its life and general insurance arm and a decline in wealth management fees.
OCBC’s insurance division, represented by Great Eastern Holding (SGX: G07), saw its income fall by close to 28% year on year to S$238 million.
This decrease was partially offset by higher trading income, which rose from S$225 million to S$251 million, and slightly increased dividends, rental, and property-related income.
Net fees and commissions decreased by 13.2% year on year from S$522 million to S$453 million.
If we break down the reasons for the drop, it came principally from lower wealth management fees.
3. Robust NIM offset by flat loan growth
OCBC’s NIM continued its upward trend, shooting up 0.75 percentage points year on year from 1.55% in 1Q 2022 to 2.3% in 1Q 2023.
However, investors should note that the NIM this quarter is slightly lower than the 2.31% recorded in the fourth quarter of 2022.
Funding cost has risen for the bank over time, which has put a squeeze on its NIM.
The bank’s deposit base grew 5% year on year to S$367 billion, but the proportion of CASA (current account savings account) has fallen sharply from 62.7% a year ago to 47.1%, in line with pre-COVID levels.
Note: CASA represents a cheap source of funding for the bank as it pays either zero or a very low-interest rate on these deposits.
In contrast, fixed deposits, which is a more expensive source of funding for the bank, has risen from S$97 billion a year ago to S$156 billion.
The bank’s loan book remained flat year on year at S$294 billion, although on a constant currency basis, it would have risen by 3% year on year.
4. Lower cost-to-income and non-performing loans ratios
OCBC did an excellent job in controlling its expenses.
Staff costs were the main reason for the year-on-year increase in total expenses.
This category jumped 7.4% year on year to S$861 million.
The cost-to-income ratio fell below the 40% mark, coming in at 37.1% for the quarter and was significantly lower than the 45.6% logged in 1Q 2022.
The bank is also seeing better credit quality with its non-performing asset balance seeing a sequential decline over four quarters from S$4.3 billion in 1Q 2022 to S$3.3 billion in the latest quarter.
As a result, the non-performing loans ratio dipped from 1.4% to 1.1% over the same period.
5. Strong performance from wealth management
The wealth management (WM) division continued to perform well, boosted by net new money inflows and record income from banking operations.
Total WM income for 1Q 2023 saw a 21% year on year rise to S$1.1 billion.
WM assets under management also rose 7% year on year to end the quarter at S$270 billion.
Get Smart: An encouraging outlook
CEO Helen Wong sounded an optimistic yet cautious tone.
She believes that OCBC’s key markets can stay resilient and have positive long-term prospects.
Her 2023 target for NIM is to come in at the region of 2.2%, accompanied by low to mid-single-digit loan growth.
However, management is also mindful of tighter financial conditions brought about by higher interest rates that may slow economic growth and heighten risks.
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Disclosure: Royston Yang owns shares of DBS Group.