OCBC’s Second Quarter Net Profit Surpasses S$1.1 billion: 5 Key Things Investors Should Know

OCBC Ltd (SGX: O39) has released its fiscal 2021 second-quarter results (2Q2021) earnings.

Along with United Overseas Bank Ltd (SGX: U11), or UOB, which released its 2Q2021 earnings on the same day, both lenders have reported significantly higher earnings amid a global economic recovery.

New group CEO Helen Wong said that the lender saw growth in multiple areas, driven by the strength of OCBC’s diversified franchise.

The broad-based growth saw the bank achieve a net profit of S$1.16 billion for the quarter due to higher fee income and reduced allowances.

OCBC’s financial and operating numbers demonstrate the bank’s resilience and ability to continue growing even as the world slowly recovers from the ravages of the pandemic.

Here are five things that investors should want to know about the bank’s latest earnings.

1. A surge in net profit

Net interest income for 2Q2021 came in at S$1.46 billion, 2% lower than the S$1.48 billion recorded a year before.

Non-interest income declined by 3% year on year to S$1.11 billion as a fall in trading income offset a surge in fees and commissions.

As a result, total revenue inched down by 2% year on year to S$2.57 billion.

Operating expenses increased by 3% year on year, resulting in a higher cost to income ratio of 44.3% compared to the 42.2% logged in the second quarter of 2020.

OCBC reduced its allowances to S$232 million for the quarter from S$750 million a year ago, resulting in net profit soaring 59% year on year to S$1.16 billion.

Of this net profit, OCBC’s insurance arm, under Great Eastern Holding Limited (SGX: G07), contributed S$192 million.

2. NIM has stabilised

Net interest margin (NIM) has likely bottomed out, coming in at 1.58% for 2Q2021.

The NIM is 0.02 percentage points higher than the first quarter’s 1.56% and just slightly lower than the 1.6% recorded in 2Q2020.

The lender’s gross loan book has increased by 3% year on year to S$275 billion, helping to buffer some of the declines in NIM.

The bulk of loans were from building and construction (27%) and housing (22%), a proportion similar to what was reported three months ago.

3. Steadily-increasing assets under management

Non-interest income declined slightly from S$1.14 billion to S$1.11 billion in the current quarter.

The drop was mainly due to a decline in trading income from S$325 million to S$212 million, offset by a 28% year on year jump in net fees and commission to S$563 million.

That said, OCBC’s private banking arm, the Bank of Singapore, reported higher assets under management (AUM).

AUM rose 10.6% year on year to end the quarter at US$125 billion.

Total wealth management income for the first half of 2021 (1H2021) jumped by 25.2% year on year to S$2.1 billion, making up 39% of total group revenue, up from 33% the year before.

4. Lower overall allowances

Similar to UOB, OCBC also reported sharply lower allowances as overall economic conditions improved.

General allowance fell more than half from S$232 million to S$101 million for 2Q2021 while specific allowances plunged to just S$131 million from S$518 million a year ago.

Total non-performing loans have been steadily declining over the quarters, clocking in at S$4.08 billion as of June 2021, down from S$4.35 billion in the same period last year.

The non-performing loans ratio inched down slightly from 1.6% to 1.5%.

OCBC also provided an update on the number of loans under relief.

As of 30 June 2021, loans under moratorium had declined to S$4.5 billion from S$5.1 billion three months ago. 90% of these loans are secured by collateral.

5. Interim dividend raised

OCBC has restored its interim dividend to S$0.25 and is in line with what was declared back in 2019 before the pandemic broke out.

Singapore’s central bank had lifted dividend restrictions on the local banks just last week, paving the way for higher dividends compared to last year.

Recall that banks were only allowed to pay out 60% of their 2019 dividends since last July as a prudent move to ensure banks remained well-capitalised in case of a prolonged crisis.

With the restrictions lifted, there’s a high likelihood that the bank can match the total dividend paid out in 2019.

Get Smart: Strong performance should continue

This set of earnings affirms that the bank is indeed enjoying a sustained recovery.

Not only has NIM stabilised, but loan growth remains healthy and fee income continues to climb as AUM hits new peaks.

Barring a significant deterioration in the economic landscape, OCBC’s strong performance should continue.

Investors will also await more clarity on the bank’s future direction as the new CEO has just come on board.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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