Oversea-Chinese Banking Corporation Ltd

SGX:O39

Earnings Call Transcript 2022-Q1

[Ching Ching Koh, executive]

Good morning, everyone. Welcome to OCBC's results briefing for our first quarter. So we have -- I know this is audio. You can't see us, but we have our Group CEO, Helen, as well as our group CFO, Darren, with us. We will have Darren take us through the slides on our results. And Helen will be giving some of our remarks before we take Q&A. Darren?

[Siew Peng Tan, executive]

Okay. Good morning, everybody. Thank you again for joining us today. So I'll start with Slide 4, on our first quarter 2022 financial reports. So you will notice that for the first quarter of 2022, we reported a net profit of SGD 1.36 billion is an increase from the previous quarter. And if you compare versus the strong first quarter of last year, net profit was 10% lower. Total income was 4% higher quarter-on-quarter, driven by a combination of net interest income, higher trading income as well as life insurance profit. Allowances for the quarter was significantly lower with the improvement in economy outlook, and we see strong quarterly performance. Our annualized group ROE rose 3.1 percentage points to 10.6%.

I'll move on to Slide 5. You will notice that essentially our 3 business pillars continue to hold up. Our banking operations net profit rose 50% from a quarter ago and 4% from the previous year to SGD 1.17 billion. Customer loans and deposits continue to grow, backed by our strong network. And the group's wealth management under management were lower as a result of the negative market valuation, while our insurance business continued to maintain healthy sales growth.

Moving on to Slide 6. The strength of our diversified franchise, as you can see in the chart here, continue to provide us more income stream and across the various business lines as well as geographies.

On Slide 7, our balance sheet fundamentals remain strong. LDR ratio was 83.3%. And if you look at the funded liquidity and funding measures, net saving funding ratio remains high at 118%, and liquidity coverage ratio remains high at 151%. And in fact, if you look at the composition of our deposits and funding, the bulk of it, 81%, still comes from our customer deposit base. So the strong funding, liquidity and competitive positions put us in a comfortable position to continue to support our customers and pursue our long-term growth.

On Slide 9, the group's first quarter net profit, as I mentioned earlier, was SGD 1.36 billion, 10% lower as compared to the first quarter last year. The combination of higher net interest income, lower allowances, were more than offset by the lower noninterest income and higher expenses for this quarter as compared to the first quarter last year. On the other hand, if you look at first quarter of this year, net profit rose 39% as compared to the previous quarter, and this is from a combination of higher noninterest income, a decline in operating expenses and also allowances for the quarter.

On Slide 10, as I mentioned, again, the net profit of $1.36 billion was 10% lower year-on-year and 39% higher vis-à-vis the quarter before. And on Slide 11, you will notice that, specifically on our banking operations, net profit grew 4% from a year ago and 50% from the previous quarter to $1.17 billion. The quarter-on-quarter increase was mainly driven by essentially a 70% rise in operating profit and also a significant drop in terms of our allowances for the quarter.

Moving on to Slide 13. Net interest margin for the first quarter expanded 3 basis points to 1.55% after staying relatively flat at 1.52% for the past 2 quarters as a result of the loan yield increases that outpaced the deposit cost itself. But with improved net interest margin and together with the 1% asset growth, net interest income grew 1% from the previous quarter and from the 4% from the last quarter to $1.50 billion.

Now moving on to Slide 14. Noninterest income for the first quarter was $1.14 billion, 23% lower year-on-year and 8% higher than the previous quarter. The prior year's noninterest income was supported by strong customer and investment activities. Whereas as against the previous quarter, the increase in noninterest income was driven mainly from higher trading and insurance income.

Now if you move on to Slide 15, fee income for the first quarter of 2022 was more subdued at $522 million. As explained in the previous slide, we had the strong first quarter last year as compared to the previous quarter itself. In this year, our financial market-related fee drivers like wealth management brokerage were higher, but this was partially offset by lower credit card loan and trade-related fee.

Now moving on to Slide 16. In terms of trading income, the quarter itself, we reported $225 million. This was from a combination of higher customer as well as noncustomer flows.

Now moving on to Slide 17 on our operating expenses. Operating expenses remained well managed and declined 7% quarter-on-quarter to $1.20 billion. The quarter-on-quarter 4 in expenses were largely attributed to the lower one-off operational charges made in the previous quarter to give you -- compare them on a quarter-on-quarter basis.

Now moving on to allowances, Slide 18. Given the improving economic environment, our credit expectation has improved. Consequently, a total allowance of $44 million was set aside for this quarter, and this constituted about 6 basis points in terms of credit costs.

And in terms of total cumulative allowances on Slide 19, the coverage ratio for our NPA was largely unchanged at 91%. And on Slide 20, you will notice that our loan payment's down with NPL ratio low at 1.4%. And Slide 21, continuing on the asset quality that we have, you will notice that in terms of new nonperforming assets formation, it was also significantly lower as compared to the previous quarter at $296 million.

Now again, moving on to customer loans on Slide 22. Customer loans grew 1% from the quarter ago to SGD 294 billion, led by growth in Singapore and other international markets. Our loans continue to be well diversified across geography and industry -- and construction, housing loans remained the largest segment at 29%, 21% of total loans by sector.

Moving on to Slide 23. Customer deposits rose 2% from a quarter ago to $348 billion and mainly led by higher fixed deposit for this quarter. However, the liquidity remains ample, and if you can see that CASA represented 62.7% of our total customer deposits.

And moving on to the last slide, Slide 24. Our common equity Tier 1 ratio remained strong at 15.2%, slightly lower than 15.5% in the previous quarter, mainly as a result of higher credit, risk-weighted assets associated with loan growth and also a decline in terms of fair value reserve arising from a falling devaluation of the debt securities in our banking book.

With this, I will pass the floor to Helen.

[Pik Kuen Wong, executive]

Thank you, Darren, and good morning to all. Let me be brief. I think Darren has already gone through our first quarter financial results. I just want to highlight that I think it is a balanced performance across our 3 business pillars. And this has continued to allow us to deliver resilient earnings in the current operating environment. We also continue to maintain a strong capital base, funding and liquidity positions. Our overall loan portfolio remains sound.

I think you would have a kind of interest in how we actually look at 2022. Our views is that Asia's growth remain resilient. There is indeed further opening of travel borders and also relaxation of COVID measures in Singapore. So we're seeing a lot more activities in F&B, retail, aviation, tourism-related sector. So there could be some upside for these sectors this year. And Malaysia, Indonesia, our 2 other core markets, have been starting to show stronger growth. Of course, it's supported by the reopening and also by higher commodity prices and revival in domestic demand.

Of course, we continue to see near-term outlook cloud with headwinds. We talked about global inflationary pressures expected to continue to trend up alongside the rising energy and commodity prices. We see rapid rise and inflation. The Fed Reserve is expected to accelerate tightening of monitoring policy and raise interest rates in a more rapid fashion. So this should further deter consumption and investment growth. So I think on the investment side, the first quarter results have really demonstrated that, amid also the volatility of the financial markets.

The China lockdown in certain cities have indeed affect output and caused some disruption to the supply chain in the global economy, but I am of the view that China is managing this. And we're seeing signs of opening up in the next couple of months.

The important piece is, of course, on our portfolio, our loan portfolio. We continue to closely and proactively monitor that. I would say we are resilient. We have a resilient credit quality in our book. Our exposures to Russia and Ukraine are minimal. Our business are, of course, as you're aware, predominantly in Asia. And our international branches overseas serve mainly our network customers.

For China, even with some of the lockdown in certain cities, there is no disruption in our provision of banking services as most of our colleagues continue to work in fact at home. Of course, we remain watchful and continue to proactively manage the risk arising from this volatility.

At the AGM last week, I talked about the group's refreshed corporate strategy. We talked about pursuing our strategy to excel for sustainable growth. So amidst the volatility, hopefully, that is shorter term than longer term. I think we are well supported by our strong capital base, our healthy funding and liquidity positions and our continuous investment in digital technology and talent. So we hope to be able to capture the opportunities arising from the transforming and fast-growing Asian markets.

So I'll stop here. We'll open for questions. Thank you.

[Ching Ching Koh, executive]

Any questions from media we have? Someone? Prisca, you're up. Prisca is from Straits Times.

[Prisca Ang]

Just wondering if OCBC has any plans to raise the interest rates on savings accounts, given that rates are generally rising right now?

[Pik Kuen Wong, executive]

Thank you for that question. In general, in the rising interest rate environment, the interest rate provided on deposits will gradually rise in tandem.

[Prisca Ang]

Sorry. Just one follow-up question. Is there a time frame the bank is looking at restoring the rates on its savings account?

[Pik Kuen Wong, executive]

So I think that is on our -- we'll do that according to our business plan. I think today it's not the forum to go into details of specific business operations.

[Ching Ching Koh, executive]

Next up is Goola. Goola is from The Edge.

[Goola Warden]

I'm here. Okay. Yes. Thanks also for the expert information on the volume and rate analysis on your net interest income. Can you just -- could you give us an update on your outlook for the credit cost, loan growth and any change in the impact of rising interest rates in your loan portfolio? Because you mentioned that in the last quarter. And also, because of all these headwinds, the inflation and the geopolitical tensions, will there be any change in your ECLs 1 and 2 because of the changes in your economic model?

[Pik Kuen Wong, executive]

Okay. Let me try to take the questions one by one. If I miss out anything, do remind me when I finish. On credit cost, we have reported a low first quarter credit growth. We've been giving out guidance on the 20 to 25 basis points for the year.

We are not changing that at the moment. Of course, as we say, we do see headwinds. And so we want to continue to be prudently managing our portfolio. Of course, I also said that -- it is in our view. We are quite resilient on that. But as we said, uncertainty out -- that's uncertainty in the outlook. So we are not changing that guidance at this point in time.

On loan growth, first quarter, it's 1%. If we take out foreign exchange impact, it's about 2%. I think similar to the industry. And of course, we have provided a loan growth target of guidance of mid- to single digit. It all depends on whether demand on loans will slow down as events unfold around the world and how actually our inflation may impact certain investment decisions by our customers and also whether people will just prefer to keep more cash in the uncertainty market.

So I think if the demand in loan growth slowed down, we probably would expect to see more this year reaching a single -- sorry, mid-single digits on the loan growth.

You're talking about headwinds and how it impacts ECL 1 and 2. Of course, we have our model to evaluate ECL, and we continue to follow that. So the first quarter results actually does demonstrate how we actually look at ECL 1 and 2. But again, of course, depending on how the market is moving, the model we adopt will be flat on how it is going to be like.

[Goola Warden]

So can I ask -- could you update us on how -- you said that if interest rate increases, it has an impact on your net interest income because they increased your net interest income. Is there any change in the figures you gave us in the first -- for the FY 2021?

[Siew Peng Tan, executive]

Goola, I think you are talking about -- this is Darren here. I guess you're talking about probably published in our annual report on the 100 basis points increase. I think there's no change in that.

[Goola Warden]

Okay, okay. All right. Can I ask one more question about your debt securities? You said there was an impact. Darren mentioned there was an impact on the capital. Is it -- is there a mark-to-market? Is it because of rising interest rates, the debt securities have to be mark-to-market lower and that affects your capital? Can I just check on that?

[Siew Peng Tan, executive]

Yes, sure, Goola. Typically, we have to hold what we call high-volatility assets as part of the liquidity and regulatory requirements. Earlier I mentioned the like of LCR and all this would mean that in the LCR, you need a high-quality asset that can liquidate in the event of a liquidity crisis.

And these securities tend to be government, high-quality sort of high-rated securities that we own. And this, as I'm kind of repeating myself here, I hope for liquidity reserve and regulatory reason.

So when interest rate rises, this will have mark-to-market revaluation. And that was what I was referring to in terms of the mark-to-market sort of evaluation that has kind of resulted in a decline in our common equity Tier 1.

[Goola Warden]

And there was some impact -- because there was some loan growth, so there was some impact on RWA as well, was there?

[Siew Peng Tan, executive]

Correct. So if you think about it, when you grow loans, credit exposure, so there will be an increase in terms of credit RWA.

[Goola Warden]

Wait, wait. I don't know how to put my hand down.

[Ching Ching Koh, executive]

Okay. All right. Anshuman from Reuters.

[Anshuman Daga]

I just wanted to get some color on the wealth management activities. And obviously, the results today are coming from a much higher base last year when you had the record profit. But Helen, if you're able to sort of give some color on how -- what is the prospects for the wealth management business? How do you see this moving forward, given the way the markets have weakened and other global banks have also warned of weaker performances in the value management business?

[Pik Kuen Wong, executive]

Yes. Thank you. I think a very good question. I think we do have a page indicating the wealth management position. And of course, this quarter, if you look at the performance, as I said, market volatility would impact investment sentiment.

So we do see our customers in a little way -- in a way sitting on the sideline for a while. And so that has dampened the wealth management fees and activities.

Coming into April, we see a bit better momentum. I think people are starting to see the market. We see that the geopolitical tension may continue. So there's -- some of the customers are coming back into the market. But I wouldn't paint a rosy picture. It is still volatile.

So we expect our customers to perhaps definitely not be as active as last year. But the crucial part is, of course, maintaining the AUM. And customers' moneys are still with us, although AUM has dropped, partly because of valuation and partly because some customers also deleveraged, right. In an uncertain environment, you will deleverage. But hopefully, the activities that we start to see in April will continue. But I definitely say that this is one of the headwinds that we are talking about for this year.

[Ching Ching Koh, executive]

[indiscernible] from the Business Times.

[Unknown Attendee]

Can I just get an update on -- because housing loans make up a sizable portion of your portfolio. Can I get an update as to -- because the COVID has passed, how has -- how have cooling measures affected, if at all, on your housing loans business? And also the second question is -- unrelated to this, is, are there any further updates on the scam incident?

[Pik Kuen Wong, executive]

Thank you for the 2 questions. We do see our domestic mortgage are gradually impacted by the cooling measures, but we see our pipeline as satisfactory, but we will be -- continue to be watchful on the demand. Property prices are perhaps stabilized. So we will continue to see demand, but that could be impacted by the cooling measures, as I said earlier.

On the scam case, we have closed that. I think what we've done in the first quarter, primarily in January, leading into February, we make the decision to make a one-off goodwill payment to the customers affected.

We talked about a number, and that has not changed much. But we have completed with dealing with all the customers, and we are -- we have made quite some changes to improve our fraud prevention on the surveillance. And we have -- as you are aware, we now have a hotline and a dedicated team to help customers if there's any other scam that may surface.

And in addition, we have launched a kill switch that customers find useful. And I think we will continue to be vigilant and also improve further on how we continue to prevent fraud.

[Unknown Attendee]

One follow-up question. Would you be able to quantify the gradual impact on the domestic mortgage?

[Pik Kuen Wong, executive]

Are you referring to how the cooling measures as you're looking for in number?

[Unknown Attendee]

Right. Yes, yes.

[Pik Kuen Wong, executive]

The number of mortgage base to either drop or increase, is it? I don't think we'll provide this sort of forecast.

[Unknown Attendee]

Yes. Okay. About what has happened in the quarter, not forecast, about what has happened in the quarter?

[Pik Kuen Wong, executive]

This first quarter.

[Unknown Attendee]

Yes.

[Collins Chin, executive]

This is Collins here. On a quarter-on-quarter basis on our books, we did see, I mean, a very small increase in our housing loans, these are the housing loans that were drawn down. But in terms of what Helen mentioned in terms of the housing inventory, I think we continue to see net additions for the inventory. And basically, these are like new bookings or new purchases of uncompleted properties.

So I think over time, this will be actually dispersed over the next few years. And so we envision the base in which our housing loans are should continue to grow.

[Ching Ching Koh, executive]

Faris from the Bloomberg.

[Faris Mokhtar]

Just one quick question. Helen, can I just get you to clarify what do you mean earlier by signs of China opening up? And do you think that China's continued insistence on the COVID policy will continue to weigh down on the Chinese operations going into the next few quarters?

[Pik Kuen Wong, executive]

Okay. Thank you. I think China is always talking about dynamic control of the COVID situation of the pandemic. So as we see continued -- sorry, as we see the control being effected, so we're keeping a very close dialogue with our operations in -- for example, Shanghai. So there is some expectation that there will be some relaxation on the way the lockdown is actually conducted.

So hopefully, such control is effected and the cases are brought down. Our exposure in Mainland China, our operations is not a very big operation. Our loan book onshore is about 2% of our total loan book. And a lot of the China business we support indeed for Chinese companies going out. So we serve them in the rest of the world in our network and, in particular, in ASEAN.

So I think the impact of this directly on the business is small. But of course, we'll continue to be vigilant in looking at how the economy is impacted by this in China, but we are indeed continuing to see economic growth in China.

[Ching Ching Koh, executive]

Faris, any other questions that you have?

[Faris Mokhtar]

No, that's it.

[Ching Ching Koh, executive]

Right. Okay. Great. Thanks. Next up is Tung Pao, [ ASEAN ].

[Unknown Attendee]

Just I have a quick question regarding for the dividend policy. I just wanted to check, is there possibility to declare any dividend for this quarter?

[Pik Kuen Wong, executive]

Thank you for that. We don't declare a quarter dividend. We will continue to maintain our policy of doing an interim and also a final dividend.