Banks are coming under the spotlight after the Monetary Authority of Singapore’s (MAS) urged the big three banks to limit their dividend payments to 60% of last year’s total annual dividend.
On Thursday, DBS Group Holdings Ltd (SGX: D05) and United Overseas Bank Ltd (SGX: U11) got the ball rolling by releasing their latest earnings.
Yesterday, it was Oversea-Chinese Banking Corp Limited’s (SGX: O39) turn to come under the microscope.
As expected, OCBC declared an interim dividend of S$0.159, which is 63% of the previous year’s S$0.25 interim dividend. The bank also offered a scrip option with the issue price of the shares set at a 10% discount.
Beyond that, there were eight key things that we learnt about the bank’s performance:
- For the second quarter, net interest income fell by 6.6% year on year due to a lower net interest margin of 1.6% but was offset by a 2% year on year increase in OCBC’s loan book.
- Net interest margin was significantly lower than the previous year’s 1.79% as governments around the world lowered interest rates in response to the crisis caused by the pandemic.
- Non-interest income rose 10.9% year on year to S$1.1 billion, up from around S$1 billion last year, consisting of mainly fees and commissions as well as premiums for life and general insurance.
- Wealth management income increased from S$751 million in the second quarter of 2019 to S$900 million in the current quarter and accounted for 34% of total group revenue for the quarter.
- This was accompanied by a slight uptick in the Bank of Singapore’s assets under management, rising from US$111 billion to US$113 billion.
- Cost to income ratio stood at 42.2% for the quarter, down from 44% a year ago.
- Operating profit before allowances was 4% lower year on year. Unfortunately, there was a significant increase in allowances for both impaired and non-impaired assets, resulting in net profit tumbling by 42% year on year to S$1.4 billion.
- Non-performing loan (NPL) ratio inched up from 1.5% in the second quarter of 2019 to 1.6% in the current quarter.
Get Smart: Into the eye of the storm
OCBC reported a decent set of earnings, though CEO Samuel Tsien warned of significant uncertainty persisting due to COVID-19.
While the bank sees some early signs of a rise in business activities, the rise is neither strong nor systemic.
There is a real risk of second and successive waves of infection from COVID-19, and it is too early to predict both the timing and path of recovery.
Tsien expects full-year 2020 net interest margin to be in the mid-to-high 1.5% range.
Looking ahead, OCBC’s management will continue to emphasize disciplined cost management by capping discretionary expenditure and adjusting the variable components of compensation.
As the withdrawal of relief to businesses looms, the bank is bracing itself for NPL ratios of between 2.5% to 3.5% for the full year.
And that’s the key figure to watch for Smart Investors.
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Disclosure: Chin Hui Leong owns shares of DBS Group, OCBC and UOB.