OCBC Profit Slumps 15% as Loans, Insurance Income Decline (2)

(Bloomberg) -- Oversea-Chinese Banking Corp., Southeast Asia’s second-largest lender, reported a 15 percent decline in quarterly profit as loans contracted and income from its insurance unit slumped. The shares fell.

Net income sank to S$885 million ($654 million) in the three months to June from S$1.05 billion a year earlier, the Singapore-based bank said Thursday. That compares with the S$898 million average forecast in a Bloomberg survey of six analysts. Smaller rival United Overseas Bank Ltd. separately reported a 5 percent profit gain for the period as trading income offset declining interest margins.

Profitability at Singapore’s banks is under pressure as economies cool in the Asian countries where the lenders operate, and lower domestic borrowing costs drag on net interest margins. Moody’s Investors Service downgraded its outlook for the lenders on June 30, citing weaker economies and slower trade growth in the region, as well as the deteriorating quality of loans to energy firms struggling to restructure their finances following last year’s historic rout in oil prices.

OCBC said its nonperforming-loan ratio had risen to 1.1 percent from 0.7 percent a year earlier, reflecting downgrades to “a number of” oil and gas-linked corporate accounts.

Sibor Slump

“Asset quality continues to be the focus for all Singapore banks and that’s definitely going to play on investors’ mind,” He Yuxuan, an analyst at Daiwa SB Investments (Singapore) Ltd., said Thursday by phone. “The interest-rate environment will stay low in the next few quarters, so NIM will stay weak.”

A stronger local dollar has weighed on interbank rates, which lenders use to price their domestic loans. The three-month Singapore interbank offered rate lost 0.31 percentage point since December and dropped by 0.13 percentage point in the April-June period.

Shares of OCBC lost 1.1 percent to S$8.75 as of 9:04 a.m. in Singapore. UOB slipped 0.1 percent to S$18.92.

Here are key figures from OCBC’s results:

• Net interest income fell 2 percent to S$1.26 billion from year earlier

• Non-interest income slumped 16% to S$788 million

• Customer loans down 2 percent to S$205 billion

• Nonperforming loan ratio 1.1 percent versus 0.7 percent

• Net interest margin 1.68 percent versus 1.75 percent in first quarter
  
  

The loan contraction came amid lower trade advances and reduced offshore borrowings from Chinese customers, OCBC said. Non-interest income sank after profit declined at Great Eastern Holdings Ltd., the bank’s insurance unit. That was mainly because of unrealized mark-to-market losses in the division’s bond and stock portfolios amid “unfavorable financial market conditions,” OCBC said.

At UOB, second-quarter net income of S$801 million compared with S$762 million a year earlier, the bank reported Thursday. That compares with the average forecast of S$769 million in a Bloomberg survey of six analysts.

“Between the two, UOB seems to have delivered the more stable results in terms of loan growth and asset quality deterioration,” Kevin Kwek, an analyst at Sanford C. Bernstein, said in an e-mail.

UOB’s earnings highlights include:

• Net interest income fell 0.2 percent to S$1.2 billion from year earlier

• Fee, commission income rose 2 percent to S$475 million

• Other non-interest income climbed 36 percent to S$338 million

• Customer loans up 4.9 percent to S$208.4 billion

• Nonperforming loan ratio 1.4 percent versus 1.2 percent

• Net interest margin 1.68 percent versus 1.78 percent in first quarter
  

(Updates with analyst quote in fifth paragraph.)

To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net, Melissa Cheok in Singapore at mcheok2@bloomberg.net. To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Darren Boey

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