Oversea-Chinese Banking Corporation Ltd

SGX:O39

Earnings Call Transcript 2021-Q1

[Ching Ching Koh, executive]

Good morning, everyone. Thank you for joining us on our earnings call for our first quarter 2021 results briefing. So today, we have Helen, our Group CEO with us as well as our CFO, Darren. And we will be letting Darren take us through the slides. Thereafter, Helen will share with us her thoughts as well as take Q&A. So I will pass the time now to Darren, please.

[Siew Peng Tan, executive]

Thank you, Ching Ching. Morning, everyone. Thank you, again, for joining us. I'll take you through the slides, and I'll refer to the pages so that it's easier for you to follow. So I'll move on to Slide 3. For the first quarter 2021, we reported a net profit of SGD 1.5 billion. This is an increase of 33% from the previous quarter.

If you look at the details of our performance, you'll notice that the -- across the core markets and businesses, we have performed well, and this reflected the strength of our franchise and that would help us continue to essentially generate balanced and resilient growth.

Now in terms of total income, we grew 17% on a quarter-on-quarter basis. The low interest rate environment continued to weigh on our net interest income. However, our noninterest income, comprising fee, trading and insurance delivered a strong performance amid an improving operating and market environment.

Now with the strong quarterly performance, our annualized group ROE, return on equity, rebounded to 12.4%. Now I would point out on Slide 6 in terms of our balance sheet. You will notice that our balance sheet remains strong with ample liquidity and funding. Specifically, if you look at our CET1 capital, it rose to an even stronger level of 15.5%, mainly from the strong earnings that we registered for the quarter.

Now moving on to Slide 7. Total income rose 17% quarter-on-quarter and year-on-year, largely from the rise in noninterest income. Allowances were also lower against the previous periods, mainly from an improving credit environment.

Now I'll move on to Slide 10. On our net interest income. For the first quarter, net interest income was only slightly above the previous quarter at SGD 1.44 billion. Following sharp contraction in tandem with global interest rate, our net interest margin has stabilized, albeit at a lower 1.56% over the last 3 quarters.

Now on Slide 11, you will notice that noninterest income rose strongly at 40% from a quarter ago and now contributed to about half of the group's total income. The noninterest income growth was broad based across insurance, wealth management and are reflective of the strong diversified franchise that we have built over the years.

On Slide 12, you will notice that our wealth management income rose to SGD 1.21 billion, driven by a combination of the rise in customer activities and market performance.

And if you were to look at Slide 13, net fee and commission income also highlight the same story. Essentially, net fee and commission on an upper trend for the last 3 quarters close to SGD 585 million, with wealth management fee reaching a new high of SGD 321 million.

On Slide 14, we also continue to see strong customer activities and that lifted our trading income to SGD 316 million for the quarter.

Slide 15. Operating expenses were 2% higher quarter-on-quarter at SGD 1.15 billion. The staff cost increased in tandem with improvement in performance. Meanwhile, we maintained discipline in terms of our discretionary spending.

Now on Slide 16, on our allowances. Given the improvement in economic outlook, a lower credit cost of 22 basis points was booked for this quarter. Allowances of SGD 161 million comprising mainly allowances for impaired assets were set aside. Roughly half of the allowances for impairment assets was for the remaining oil and gas exposure that we have on our book.

Now on Slide 17, you'll notice that with the added allowances, our coverage for NPA rose to 118%. Now in terms of asset quality on Slide 18.

You will notice that our loan book remains sound with NPL unchanged at 1.5%. And if you look at the details on Slide 19, new nonperforming assets of SGD 375 million were roughly offset by an equivalent increase in recoveries and upgrades.

And this increase in upgrades and recoveries were mainly in the oil and gas offshore support vessels and also transportation sectors. Now moving on to Slide 20. Our loans grew 1% to SGD 271 billion, mainly outside of Singapore and to our network customers in China and in the United Kingdom.

And in terms of the details of our customer loans on Slide 21. Loan portfolio remains well diversified. Building and construction still represented the largest segment at 27% of our total loans. Oil and gas contributed 4% of our loan book, including 2% in the OSV oil support vessel -- oil and gas support vessels sector. Specifically, our OSV exposure, net of specific provision now represents about only 0.1% of our loan book.

We continue to grow our green and sustainable finance portfolio, increasing 9% quarter-on-quarter to SGD 15.3 billion.

Slide 22, on our relief -- loan relief program. Total relief loans now represented 2% of our total loans. Although as you can see in the details, the quantum has reduced from SGD 5.7 billion to SGD 5.1 billion. 92% of these relief loans were secured, and most of our customers indicated that they did not require further assistance beyond this program.

On the final slides on deposits, you'll notice that our liquidity remains ample. CASA continued to grow 3%, in this case, to SGD 195 billion Correspondingly, our CASA ratio rose to 61.8% this quarter. We continue to deemphasize fixed deposit and also our customers prefer the flexibility arising from current accounts and savings accounts.

Now with this, I'll end my presentation and pass the floor to Helen.

[Pik Kuen Wong, executive]

Thanks, Darren, and good morning, everyone. Thank you for dialing in for our first quarter results. I have met some of you, but hopefully, with the pandemic situation continue to improve for the midyear, we'll be able to see you in person.

So I'd like to just cut out a few points. And since Darren has talked about the numbers and the results in full, I just want to highlight a few points regarding our business performance for the first quarter.

I see the first quarter performance as exceptional. I think this is due to a market -- due to market conditions that are conducive and we have had very strong earnings across key markets and businesses. And indeed, we also see diversified earnings and that rest on the strength and resilience of our 3 pillars of our business, which is wealth, insurance and of course banking operations.

We also see a stable loan book from the level of some growth in Greater China and our network customers in the U.K., as Darren has mentioned. I'm happy with the CASA ratio, which is now at 61.8%, and it grew from something like 51% a year ago in the first quarter of 2020. Also see a stable NIM at 1.56%. And lastly, a lower allowance of SGD 161 million and -- which is in general commerce, transport and manufacturing.

So with that, I also want to touch on the market conditions at the moment and would lead to some of the outlook that I will talk about. So we are seeing a strong recovery in global output and trade in 2021 led by revival of economic activities in the U.S. and we are well aware that U.S. growth is driven by monetary stimulus and also fiscal spending. Another important economy, obviously, China has seen accelerated pickup in exports and also a very strong domestic demand. On economic recovery also expected to be strong in our core markets of Singapore, Malaysia, Indonesia and Greater China.

However, recovery is not broad-based yet. We see, actually, this is very much due to emerging variants of COVID-19 and also slow rollout of vaccination in certain countries. So a true return to normal, I guess, will take time and perhaps longer than we think in this year.

So we'd like to focus on developing our network to support our customers and also to capitalize on signs of sectorial recovery. So -- and with our strong balance sheet and capital position, I'm happy that we are focusing on a lot of the business momentum based on the recovery.

So on the outlook, we look at our loan growth as having momentum to lead to faster growth in the rest of the year. And I'm thinking about a mid- to high digit -- single-digit growth in our loan book. And we will be focusing on the large Singapore corporates, Chinese business diversifying banking relationship in ASEAN, the activities of the SMEs across our core markets as the economy recovers.

And also, we are also already seeing momentum of demand for loans in infrastructure, logistics, transportation, real estate and also a lot of demand from private funds that is managing the wealth in the region.

So on the provision side, they are losing some size. I do not expect huge amount in the next 3 quarters. The relief program has seen healthy repayment trends since they start leaving the relief period. We stay with our guidance of 100 to 130 basis points for 2 years for our allowances, but we believe that it will be on the low side.

So I would end here and we'll open the floor for questions.

[Ching Ching Koh, executive]

Okay. Thank you, Helen. First person with -- in the queue is Chanya.

[Chanyaporn Chanjaroen]

Congratulations on the big [indiscernible] reported today. My first question could I get guidance for NIM for 2021? Second question, could I get your comments -- Helen's comments on your appetite, whether you are interested in city consumer banking assets that are on sale at the moment. And could you share that if you are interested which markets would be most beneficial to OCBC. Those are my 2 questions.

[Pik Kuen Wong, executive]

Okay. I just want to recap the 2 questions. The first 1 is our guidance for NIM, which is the NIM. And then the second one is about city retail business, right? So I think for NIM, because we are in a low interest environment. And I think, there is no particular events in the market that would lead to a certain change. I think we will be able to protect the NIM on rather stable manner. So I think that's the answer to your first question. On city, I just want to say we are always open on opportunities on the markets that we have an operations in. So we'll stay open and for this -- on this particular opportunity that arise.

[Chanyaporn Chanjaroen]

Thank you, Helen. But just to follow up, I mean you already have quite a huge franchise in Greater China. Would something in Southeast Asia be more beneficial or more accretive to you?

[Pik Kuen Wong, executive]

We actually have our core markets in Singapore, Malaysia, Indonesia, and Greater China. So we constantly open to ideas and opportunities. And I don't necessarily you need to think about particular markets in that sense.

[Ching Ching Koh, executive]

Goola, your next.

[Goola Warden]

And congratulations on your very, very good results. So in terms of your very high CET1, would you be open to returning some of this capital to shareholders? Or would you prefer to focus on growing? And if you are focused on growth, would it be sort of organic growth in terms of your markets? Or would you look at bolt-on acquisitions?

[Pik Kuen Wong, executive]

I'll let Darren take the first part of the question, and then I'll talk about growth.

[Siew Peng Tan, executive]

Yes. Goola, thanks for your question. Maybe before I answer your question specifically, I want to highlight that essentially CET1, common equity tier 1 capital adequacy ratio is a ratio meaning it is equity capital as a numerator and risk weighted asset as a denominator.

Now the high CET1 came about essentially because we have been optimizing our risk weighted asset, which is also why you have seen that the volatility over the years, especially in 2020, whereby it first declined to 14.2% and then recently sort of going back to 15.5%.

In terms of the numerator -- sorry, and the movement during this period essentially arise -- arose mostly because of the optimization of risk weighted assets I mentioned to you. Now your question pertaining to how we plan to essentially then -- because of the optimization, having the option then to return some equity capital to our stakeholders. Now if you look at our history in terms of how we manage our numerator, it's always been one of year dividend in a sustainable, progressive manner.

And obviously, this policy pertaining to sustainable sort of a progressive dividend policy, we have to take guidance from the regulator as well. In this case, as we all know, last year, the regulator has also set a cap in terms of the dividend that we could pay out. So the prospect of that return of capital would, to a certain extent, depend on the regulator leaving that cap and from there, we will have to then assess the outlook going forward and see how we can fine tune that dividend accordingly.

[Pik Kuen Wong, executive]

Thanks, Darren. I think on growth, we are obviously positioning ourselves for the future. There are a few things you can classify as organic growth. Obviously, we want to capitalize on the flow of capital, trade investments across ASEAN and Greater China. We do want to continue to expand our leading wealth management franchise. We also want to continue to invest in elements into sustainability. I want to continue to expand our sustainable finance book.

And also, we want to accelerate digitalization, so we'll be making investments in those. So as to inorganic, I just mentioned, we remain open to opportunities that come up. But yes, nothing further to comment on that.

[Ching Ching Koh, executive]

Anshuman, your next.

[Anshuman Daga]

Thanks for the time for the numbers. I want to check with you and you highlighted some of the points about loan growth and net interest margin. What would you say would be among the biggest risks for the banks on the recovery part? I mean almost all the banks have provided for lower credit allowances and pointed to loan growth.

But can you highlight any key risks that could sort of really prevent this from happening or something that you are mindful of in the next few quarters?

[Pik Kuen Wong, executive]

Yes. Thank you for that question. Very good. This is something we look at all the time as to the risk of the portfolio. I think the first thing is we have a well-diversified loan book in the different industries. On some of the factors that have given us some NPLs in the past, I think we have made enough provisions and cleaned up quite a bit. And there is, as the economy recovers, we actually do have some write-back realizing some of the collaterals.

So there are important sectors that we are focusing in. I think on health care, on transport, on manufacturing that leads to exports -- imports and exports. And yes, there are sectors, this is still under pressure, hospitality, aviation. This is still under pressure. But I think we are -- for certain sectors, we are already past the trough, I think.

So -- but we will continue to look at which are the sectors that offer more growth and healthy growth as well.

[Ching Ching Koh, executive]

Kelly from Business Times -- sorry, it is Takashi. Takashi actually next in queue after Anshuman. Takashi, your next.

[Takashi Nakano]

Net profit for this quarter is SGD 1.5 billion. So is this a historical high?

[Pik Kuen Wong, executive]

Yes, this is historical high for the quarter.

[Ching Ching Koh, executive]

Yes, Takashi, it is historical high. Yes.

Okay. We will take questions from Kelly, please. Kelly, you're up next.

[Kelly Ng]

And congratulations on the results. I wanted to ask, how do you see competition shaping up for the Greater Bay Area, especially given that DBS recently bought a stake in the Shenzhen Rural Commercial Bank.

[Pik Kuen Wong, executive]

Thank you for the question, Kelly. I think the Greater Bay Area has been discussed for quite some time now among ourselves and our peer groups. But I just want to highlight that it is a very big market.

If you look at the population, it's more than 60 million. If you look at the wealth accumulated in that area, it is huge, and we're talking about flow that we're already seeing Chinese customer very interested to invest outside of China.

So that was expected a lot of outbound investments. Actually, as China opened up its capital markets, we do actually see inbound interest as well so bringing investments into China.

Yes. Although, we are yet to see more details of how the wealth going to open up. But I think we are well positioned in the Greater Bay Area with our presence of around 80 branches in that part of the world.

So in terms of working with other partners, we have a very strong partnership with a couple of financial institutions in China. So I think that also help us in sourcing our customers and also taking customer on both inbound and outbound. So we're pretty happy about it. Very strong competition I expect. And -- but indeed, the market is so big that I think the pie is big enough for everybody to do reasonable business.

[Operator]

Prisca from The Straits Times. Prisca?

[Prisca Ang]

I have a question about OCBC sharing last week during its annual shareholder meeting that it might be reviewing its office space requirements and cutting down number of branches. Does the bank have an update on this in terms of exactly how much space it plans to cut and how many branches it plans to close?

[Pik Kuen Wong, executive]

Yes. Prisca, thank you. I think on branch, branch network continue to be a very important part of our infrastructure to serve our customers. And if you look at demand, our footfall into branches, obviously, there are 2 things that actually impact the way we think about how we optimize our real estate, our branch.

The first thing is, obviously, in particular, driven by COVID more and more customers are using digital means and that means that the requirement of visiting a branch has fallen. But also as our customers begin to consider a lot more about how to manage the wealth, we do need our branch to actually talk to customers and meet with them and actually do financial planning with them.

So there are these 2 forces that is always there to allow us to consider how to optimize our branch network. Yes, there will be a reduction in the space if you see that, it's -- there is no longer the requirement for the number of branches. We have reduced some branches last year but mainly in Indonesia.

Indonesia has a large number of branches. And actually, the reduction is mainly there. So going forward, we will continue to look at our requirements and then optimize our branch network planning as appropriate.

[Ching Ching Koh, executive]

Prisca, is that all right?

[Prisca Ang]

Yes, that's fine.

[Ching Ching Koh, executive]

Chanya, it's up to you again.

[Chanyaporn Chanjaroen]

Helen, could you a bit -- actually, my question was the same about office space. But could you clarify how many branches in terms of percentage that you reduce in Indonesia?

And in Singapore, how is your space for each employee like -- is it like more than 1 meter per person, more than 1.7 meters, how much room do you have to reduce?

[Ching Ching Koh, executive]

So Chanya is asking about percentage of change in Indonesia branch network as well as the reduction in office space, right, Chanya?

[Chanyaporn Chanjaroen]

Yes?

[Pik Kuen Wong, executive]

Chanya, I think we do actually -- we have reduced our branches over the years. I think potentially, I think as the ballpark number maybe over the last 3 to 5 years, we may have reduced 10% of the branch numbers across the group.

So that would be a percentage in line. If you talk about office space, obviously, in Singapore, in particular, where we have the most real estate and also the largest number of employees, we have been adopting a hybrid model of working from home and working in office. And obviously, following guidance from the government as well on that. But indeed, I think our hybrid model has become quite mature. And in office, of course, we need to continue to allow people to have safe social distancing.

So all in all, I think we are not reducing our real estate assets because we own our buildings, but we continue to optimize the space that we use, and we create, for example, more space for discussion and more space for people to, for example, do a call on a private basis without having to share space with people.

So there is a lot of optimizing but the important thing is to make sure that our colleagues can work effectively, either remotely or in office.

[Chanyaporn Chanjaroen]

I see. And 1 follow-up question on loan growth. I think your loan growth in the first quarter was about 1% from a year ago. But your outlook that you mentioned at the beginning is about mid- to high single digit. When do you see such acceleration of growth?

[Pik Kuen Wong, executive]

Thanks, Chanya. I think first thing is we already see a lot of momentum built up. And for our customers, quite a lot of talking to us about new facilities in the activities.

So that's why I think we will have a more accelerated growth rate in the next 3 quarters.

[Ching Ching Koh, executive]

Okay. We are going to end this session. Thank you very much and have a good day. And -- oh, sorry, we have Goola. Yes, Goola, you are last before our Phase 2 tomorrow. Go ahead. Goola.

[Goola Warden]

Can I just ask Darren a question on the allowances? What are the -- what are your -- could you just remind us, what are your total allowances? And how successful is a management overlay?

[Siew Peng Tan, executive]

Yes. Goola. Slide 17, you actually would be able to see our total allowances. So if you were to look at the breakdown in terms of allowances, we have about SGD 4.7 billion plus over there. And it's a combination of essentially sort of ECL 1 and 2 allowances for non-impaired assets and then ECL 3 sort of allowances for impaired assets, which is the darker blue inside the bar. And then obviously, what we call regulatory loss and allowances in the yellow part of the bar, which is SGD 874 million.

So the overlay that we set aside is roughly about SGD 400 million or so, and that's predominately in the ECL 1 and 2 portion of this allowance.

[Goola Warden]

So can I just check so the RLAR part cannot be written back? Can it?

[Siew Peng Tan, executive]

No. That part can be written back.

[Goola Warden]

I see. Okay.

[Siew Peng Tan, executive]

So if I may just elaborate, essentially, when you make provision, whether it's ECL 1, 2 or 3 that is predominantly from the current quarter earnings, right? Whereas for RLAR. Internally, we call it RLAR because it's [indiscernible] right? That is from past earnings, retain earnings. So in a sense, as long as we have sufficient, and we do feel that we have more than sufficient coverage. At some point in time, we may actually also look to write that back into our performance.

But one thing I want to point out for this quarter, if you notice, we have not sort of write back any allowances across the 3 categories.

[Goola Warden]

Yes and the management overlay, can you write that back as well? Or is that -- because I think 1 of your peers said that they wouldn't use that to write back.

[Siew Peng Tan, executive]

Yes. Maybe just it's a bit technical in terms of the management overlay. The reason is because going into the -- what I call, going into the ECL model approach. There is certain assumptions that is very much based on mean variance, right? You have very much sort of a standard model pertaining to mean variance. Based on history, what is the average expected loss and what is the variance of volatility around that expected loss.

But as we experience in this pandemic, depending on who we you read and who you talk to is the multi-standard deviation event. And in that sense, the model will not be able to capture that multi-standard deviation event. Hence, the need to set it aside some -- in this case, management overlay to adjust for that multi-standard deviation event.

Now then the question going forward is whether you think that multi-standard deviation event could potentially arise at some point in time. And that is where you might want to make the assessment of whether to write back on management overlay or not.

[Goola Warden]

Okay. So you don't use that to write back at the moment. Is that...?

[Siew Peng Tan, executive]

Sorry?

[Goola Warden]

So I mean if you are going to write back, it will be from your general allowances. Is that right?

[Siew Peng Tan, executive]

I think one of our peers did undertake some of that.

[Goola Warden]

yes.

[Siew Peng Tan, executive]

But for us, there's no intention whatsoever at this point in time. Yes.

[Goola Warden]

Okay. Okay. Okay. Is there any condition which would allow you to write back? That's what I meant to know.

[Siew Peng Tan, executive]

Sorry, Goola, do you mind repeating that question?

[Goola Warden]

Under what condition would you write back some of the allowances -- some of your provisions that you've made because everybody needs more than they require?

[Siew Peng Tan, executive]

Yes. Again, if you refer back to the model in terms of ECL, and I mentioned mean variance, right? I guess to a certain extent, the experience of their volatility will over time accumulate in that model. So in that sense as long as that mean variance component has sort of stabilized, meaning in terms of outlook being clearer, the trajectory in terms of what we're experiencing now becoming clearer then potentially we may explore that.

[Ching Ching Koh, executive]

I don't see anyone having other questions to ask. With that, we will end today's session. Thank you, everyone, and take care.

[Pik Kuen Wong, executive]

Thank you, everyone.

[Siew Peng Tan, executive]

Thank you.