Oversea-Chinese Banking Corporation Ltd

SGX:O39

Earnings Call Transcript 2020-Q3

[Ching Ching Koh, executive]

Okay, good morning. Welcome to OCBC's third quarter results briefing. We have today with us Mr. Sam Tsien, our CEO; and Darren Tan, our CFO. I'm going to let Darren take us through the slides. And then after that, we will take questions. [Operator Instructions] Okay. Darren, please.

[Siew Peng Tan, executive]

Okay. Thank you, Ching Ching. Good morning, and thank you for joining us.

We are pleased to report a net profit of SGD 1.028 billion for the third quarter, while net interest income continued to decline on the back of lower interest rate globally. Our noninterest income franchise in wealth management and insurance was able to generate a relatively robust performance. This demonstrated yet again the benefit of having a diversified portfolio of businesses. And hence, multiple sources of revenue.

With the phased opening of the various markets, we have also been able to engage our customers and grow our wealth management and insurance franchise further. Consequently, total wealth management income rose 4% from the previous quarter. Bank of Singapore asset under management also expanded 3% to USD 116 billion, supported by continued growth of net new money and positive market valuations. Great Eastern's total weighted new sales increased 51%, while new business embedded value was 47% higher.

We continue to monitor and tighten our expenses. We also remain vigilant to the resurgence of COVID-19 infections and the rise of renewed disruption to the various economies. Further, we want to brace ourselves for any delayed impact arising from the pandemic when the various support measures were gradually withdrawn.

Consequently, we set aside total allowances of $350 million for the third quarter 2020, including an additional management overlay of $150 million. This in turn raised our NPA coverage to 109%. We further fortified our balance sheet with a 75% participation rate in our scrip for the interim dividend. And together with the profit retained for third quarter 2020, our Common Equity Tier 1 had increased to 14.4%. Our liquidity and funding remained strong with all-currency liquidity coverage ratio and net stable funding ratio higher at 128% and 122%, respectively.

I will now highlight some of the key financials before handing the floor over to Sam. Turning to Page 7. Net profit for the third quarter was 41% higher quarter-on-quarter at $1.028 billion. Operating profit before allowances was $1.59 billion as compared to $1.68 billion in the previous quarter. Higher fee income and customer flow treasury income were more than offset by the decline in net interest income.

On Slide 9, you can see that for the 9 months of 2020, the group's net profit was 32% lower at $2.46 billion as compared to $3.63 billion a year ago. The lower profit was mainly due to the significant amount of allowances that we set aside, particularly in the first half of this year to buffer against any pickup in credit losses.

Moving on to Slide 12. Net interest income for the third quarter declined 4% to $1.42 billion from $1.48 billion in the second quarter, mainly from a 6 basis point contraction in our net interest margin to 1.54%. We continue to -- our strive, in this case, to optimize our balance sheet by lengthening the duration of our loan portfolio and also increasing the proportion of our less expensive deposit.

Now in terms of noninterest income on Slide 13. Noninterest income for the third quarter was $1.12 billion, 6% higher year-on-year, but 2% lower than the previous quarter.

Going to Slide 14. Our wealth management franchise remains strong. Total wealth management income for the third quarter rose 4% to $938 million and now constitute 1/3 of the group's income.

15. For the third quarter, net fee and commission rose 14% quarter-on-quarter to $501 million. In particular, wealth management and brokerage fees were higher and had recovered to pre-COVID-19 level.

I'll move on to our allowances on Slide 18. For the quarter, total allowances were lower at $350 million as compared to $750 million in the previous quarter. We have set aside lower allowances of $148 million for impaired assets and a prudent amount of $202 million of allowances for nonimpaired assets in the quarter. Specifically, allowances for impaired loans in the third quarter were not concentrated in any particular geography or sector as compared to the additional allowances that we made for the offshore support vessels, NPL in the second quarter.

Now on Slide 19, you can see that as a result of the additional allowances, total NPL coverage was further strengthened to 109%.

Now in terms of asset quality on Slide 20. The credit quality of our loan portfolio remained healthy with NPL ratio unchanged at 1.6%.

On Slide 21, you will notice that total nonperforming assets was $4.25 billion, 2% lower than the $4.35 billion a quarter ago. The decline was mainly attributed to recoveries and upgrades of $200 million and write-offs of $91 million, respectively. This more than offset the new NPA formation of $270 million in third quarter. In comparison, new NPA formation was $496 million in the previous quarter.

Moving on to Slide 22. Customer loans grew 2% year-on-year and 1% from the previous quarter to $269 billion. The growth came mostly from Singapore, Australia and the U.K.

On Slide 23, you will notice that our loan portfolio remain well diversified. Oil and gas sector constituted 5% of our loan book, including 2% in the OSV sector. Specifically, our OSV exposures net of specific provisions were now only about 0.2% of our total loan portfolio. Our exposure to the commodity sector was about 5% of total loans. And in the transportation sector, loans to the shipping sector excluding OSV was 2% of total loan, of which the aviation sector remained at less than 1%.

Now in terms of deposits, on Slide 24. Customer deposits were $307 billion, up 3% year-on-year and unchanged from the quarter before. Current account and savings account deposits rose to a new high of $182 million, with CASA ratio now at 59.2%. We also allow the higher cost fixed deposit to gradually runoff.

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

[Samuel Tsien, executive]

Good morning, everyone. Welcome to this session. During the quarter, we have observed that there is increased customer activities, which is also reflected in the increased fee income that Darren mentioned. This includes our wealth management fee, our credit card fees as well as our customer-related treasury flows and insurance banker sales.

On the other hand, the bank continued to manage its cost very well. You will notice that our cost in the third quarter was lower than the previous quarter. And the previous quarter was even lower than the prior quarter. So this is the third consecutive quarter of our expense management.

Having said that, it is important to point out that our investments in technology and digitalization continued. As a matter of fact, our technology expenses as a proportion of our total expenses continued to rise over the past 3 quarters despite the fact that our overall expenses is controlled and they declined quarter-by-quarter.

On the portfolio quality side, it is well-managed and the new NPA formation is actually quite low. The net NPA is reduced as compared with the previous quarter as a result of upgrades and recoveries. We are currently fairly prudently covered in terms of allowances, which is at 109% of our total NPA.

I would like to talk about the economy in general. I think what we have observed is that the increased business and customer activities is a good reflection that the economy is stabilizing. At this point in time, I think I would not say that it is already on a recovering mode because there continue to be pressures, both locally as well as from overseas. As you would appreciate, Singapore being a hub economy depends very much on the well-being and the growth of our neighboring countries as well. We see that some of our neighboring countries continue to be affected by the spreading of the virus and therefore, has resulted in the clamping down of activities in their economies, which is going to be reflected in Singapore economy as well. But on the other hand, I think we are learning to live with the virus and the -- generally speaking, the strategies and the policies taken by the government here is very effective. And picked up by governments overseas are also very practical. So as a result of that, I would say that the economies are indeed stabilizing.

I would also like to talk about the relief program which is gradually maturing with one of our key markets, Malaysia's relief program having ended at the end of September. So as a result of that, as was reflected in my update, we saw the total amount of our loans which is under the relief program to have reduced from the last time when I met with you. For the second quarter briefing, it was at 10%. At the end of September, this is before Malaysia's exit from the relief program, it has come down to 9%. And after the exit of the relief program in Malaysia, by far, the majority of that did not reapply for the continuation of the relief, which, as a result of that, by the end of October, our total loans under relief program is reduced to now only 5%.

The other observation is that the exit of the relief program in Malaysia has seen a majority, meaning 90-plus percent of our customers, have been able to revert to its original repayment schedule. Having said that, I would also like to caution that this is based on their first and second repayments. The sustainability of repayment could be affected by the continued imposition of some restriction and movements in Malaysia as a result of the spreading of the virus. So this first and second months of repayment experience may not be as sustainable as we are currently seeing. But by looking at the first 2 payments, it shows that there is resilience in the portfolio in Malaysia. And therefore, our view is that the exit from the relief program is probably better than what we had operationally expected.

Looking ahead, I think what we currently see is challenges in the economic environment will continue, but it will stabilize. There are new areas of customer activities of which we are pursuing, and this includes in sectors of sustainability and renewables. We are also following closely our supply chain transformation. And there are quite a number of acquisitions -- customer acquisitions, restructuring and overseas diversification of which we are involved.

We have strong capital. We have strong liquidity. But at this point in time, we do not have any merger and acquisition plans under review. Going forward, the way that we will continue to manage the bank is to maintain strong capital, strong balance sheet. And although I said the economy is stabilizing, there could still be headwinds that we need to face. And so the result of that, this strength that we have been able to preserve very well as reflected in our capital and funding and liquidity and the diversification, will continue to service us well.

On the digital front, we will continue with our investments. As a matter of fact, because of this virus, we are in a way, happy to see that the customers' take-up rate of the digitalization offers that we have made and we have invested so substantially in the past, have now started to reap results. During the third quarter alone, the new sign-ups on our digital channels increased by 50% over that of the prior quarter.

In terms of the credit cost, although we saw that customer activities have increased and business momentum started to pick up, we are current time, maintaining our credit cost estimate at 100 to 130 basis point for the 2 years, this year and next year combined, and NPL ratio could rise to 2.5% to 3.5%. And this is basically based on our view that some of the customers, after the relief program, may have to continue to apply for continued relief, in which case, we may have to classify them as NPL. We will continue to be as accommodating as reasonable to make sure that we will help our customers ride through this storm, a relatively healthy state.

With that, I'll open up to any questions.

[Ching Ching Koh, executive]

[Operator Instructions] [ Jan Ya ].

[Unknown Analyst]

Sam, congratulations on this good sets of earnings that we estimate. And also noted that you mentioned no M&A plans. But as your wealth management franchise doing so well, what's your plan to grow the wealth sector further?

Second question. The U.S. Presidential Election seems quite indicative of Biden win. What's your expectation of this on the global economy and Asia?

[Samuel Tsien, executive]

Okay. Thank you. Good morning, [ Jan Ya ]. Good to hear your voice. On the wealth management side, we will continue to deepen our wealth management presence across the region and also on a selective basis outside of this region. We believe that from an infrastructure perspective in terms of our coverage, market coverage, in terms of our relationship managers, in terms of our research, in terms of our system capabilities to do good reporting to our customers, but those are already in place. With that, we will probably be able to deepen in the markets that we're already in, including establishing more domestic presences in the overseas countries.

So far, as you know, we do quite a bit of wealth management from Singapore, from Hong Kong, from Dubai, from London. But in some of the Southeast Asian countries, we do not have a direct presence yet. Under the Bank of Singapore name, we will consider establishing direct presences in some of these countries of which we are doing business with them on an offshore basis, but domestic private banking is also coming up strongly. So we will look at...

[Unknown Analyst]

Could you please say which Southeast Asian countries that you are looking to establish onshore presence?

[Samuel Tsien, executive]

We already have an onshore private banking presence under OCBC NISP in Indonesia that was set up a few years ago. It is not under the Bank of Singapore name because we used the OCBC NISP named to pursue private banking there. Other countries that are good countries in terms of wealth development would include countries like Malaysia and some of the Asian countries. So we will be looking at that to establish wealth management offices in those countries.

[Unknown Analyst]

What about my country, Thailand?

[Samuel Tsien, executive]

All of the countries will be under review. We will continue to look for opportunities to establish a domestic presence there. But we believe that from an infrastructure perspective, we already have adequate infrastructure to pursue those domestic activities without an M&A activity in mind.

With respect to your second question on the U.S. We, as observers, are observing that very interestingly. The final result, I think, will still have to be seen. But as a general statement, U.S. is a well-established political architecture. In terms of their importance to ASEAN and to Asia, it will continue to be very high.

The political leadership change will probably only impact policy changes gradually. But I don't think the policies that has been established over the past few years will be abruptly changed. So we will continue to observe that. I do not think that there will be any particular risk that we need to be cognizant of. But the continued follow-up on the final result will be something that we will pay very much attention to.

[Unknown Analyst]

Sam, sorry, can I just clarify one point? During your presentation, I think you projected NPL ratio. Could you repeat that, what the -- and has that changed from your previous guidance?

[Samuel Tsien, executive]

No, it has not changed. At the onset of the crisis, we looked at the depth of the crisis and assessed the implications on the portfolio. We believe that on a gross NPL basis, not on a net basis, we report our net NPL. For example, the 1.6% that we reported is the net NPL. Net NPL in terms of -- we have the total NPL and then we reduce it by write-offs.

Okay. So on a gross basis, we think that it will be in the range of 2.5% to 3.5% at its peak during this 2-year period. But if we write-off some NPAs, of course, this ratio is going to come down. But before write-off, it may go up to 2.5% to 3.5%.

Now with the observation that economies are stabilizing and recovery is probably some time away, but it will come, what we believe that we will probably be looking at the lower range of that -- lower end of that range of 2.5% to 3.5%.

[Ching Ching Koh, executive]

Next up would be Goola.

[Goola Warden]

Can you hear me? Yes, congratulations. I think the results were -- well, better than I expected and better than everyone else expected. So sorry, can you hear me?

[Ching Ching Koh, executive]

Yes. Yes.

[Samuel Tsien, executive]

Yes, very clearly, Goola.

[Ching Ching Koh, executive]

Yes, Goola, we can hear you. Yes.

[Goola Warden]

Okay. Great. Great. Great. So can I just ask, have we seen the worst of the credit costs for these 2 years? I know you mentioned 1.3% overall. And is your credit quality tracking better than your 2Q expectations? And could that be right back next year? That's one question.

And the second question, of course, is in terms of dividend, how much is the dividend at the capital? And what are your likely trends for FY 2020 dividend, if you could? And is there any likelihood of reversing to higher levels in FY 2021?

[Samuel Tsien, executive]

Thank you. I'll take the first question. I'll ask Darren to comment on the dividend and the capital outlook. On the credit cost, I would say that from an economic perspective, we probably have seen the trough in the second quarter and third quarter stabilizing and gradually improving. And this is consistent with the economic forecasts that is given by international agencies including ourselves.

However, we have to recognize that credit cost is -- usually lags the economic recovery. So when you see the trough in terms of economic performance, the credit cost typically has got a lag of somewhere between 3 to 5 quarters is the normal observation. So in that sense, we are, therefore, not changing our credit cost of 100 basis point to 130 basis point for the time being. But it looks likely that we will end up again just as the NPA ratio that [ Jan Ya ] mentioned earlier, at the lower end of that range of 100 to 130 basis points.

With respect to the write-back of the credit provisions. It really depends on the economic development. If the economic recovery is gradual but it's not fluctuating, which is a better sign than a fluctuating recovery. If it's gradual and it's not fluctuating and it trended towards the recovery side, our current prudent stance on creating allowances for our portfolio may provide us some room for us for future positive adjustment, meaning, may not be as high as we currently see.

You noticed that in our provision, we have created what is called a management overlay. And this amount totaled at $415 million at the end of the third quarter. This is, again, on a forward-looking basis, we are expecting that there might be a portfolio deterioration, which will result in the future requirement for credit allowance. Because we do see that as a possibility, we have created that management overlay on top of the forward-looking ECL provision that we have made. So Darren, on your...

[Siew Peng Tan, executive]

Yes, Goola, in terms of dividend, actually payment of dividend is a subtraction. So I believe what you're referring to is the recapture of the dividend via scrip. And in this case, we're talking about roughly about $527 million or so, and that translate to about 0.2% of CET1.

[Goola Warden]

but what about the outlook for dividend?

[Siew Peng Tan, executive]

In terms of -- which aspect of it?

[Goola Warden]

Well, in terms of next year in FY 2021, because MAS has given some sort of guidance as to how much you can pay for this year. But would you be able to have a bit more leeway to set your own dividend levels next year, in FY 2021, so that will be when it's paid in the second half of FY...

[Siew Peng Tan, executive]

Yes, we do not answer that question at this point in time. But if you were to look at when that decision -- that decision has been made, it's probably for the interim of next year. Because, as you know, MAS has already guided for this year, interim and full year, to apply the cap of 60%. So in that sense, to that question, we'll probably have a bit more visibility by probably what -- July, August next year.

And I guess one trend that we should monitor is obviously the debate on this matter in other jurisdictions. Obviously, we also hear of -- read about reports about other bank in other jurisdictions sort of proposing and potentially discussing with their regulators in terms of the limitation on their dividend. So that's something that we are monitoring as well. But please, more specifically to ourselves, we probably would be -- we will better get a best view by sort of middle of next year.

[Ching Ching Koh, executive]

Next, we have Natalie. Natalie from Business Times.

[Natalie Choy]

Sam and Darren, congrats on the results. So I just have 1 question. Are you expecting a new wave of moratorium requests in Singapore following the new extended credit relief support?

[Samuel Tsien, executive]

I think the answer is no. The Singapore government is very proactive, but they also recognize that there is a limit as to how much the government guidance can do for the private sector. So as you would have noticed from the press releases, we are working on an extension of support scheme, but it will not be on a blanket basis. It will be more targeted at this time vis-à-vis that was introduced in the second quarter of this year. So we do not expect that there will be a blanket moratorium request that will come out, neither do we think that the local economy requires a blanket moratorium because it's all sector-based and we are, therefore, as was noted in this latest scheme that was announced, very targeted, and we will continue with that.

[Natalie Choy]

Okay. So for the targeted support, is there a particular industry or sector you're expecting maybe more requests?

[Samuel Tsien, executive]

Yes. I think the general industry that are under more severe impact include the hospitality industry, the tourism industry, the airline industry and aviation-related industries. So this is the first order sector. And we do have customers in that sector. And we do have, more importantly, consumers who are customers of ours who are working in that sector. So we will be focusing on that sector to provide the assistance that may be required.

[Ching Ching Koh, executive]

Anshuman, you're next.

[Anshuman Daga]

Can I check with you on -- you mentioned that the credit cost could be at the lower end of estimates -- lower end of estimate. What the biggest challenge that OCBC faces to resume growth in these markets?

[Samuel Tsien, executive]

The growth has to be consistent with the economies. So at the present time, we see that the economic activities and business activities, customer sentiments have stabilized. But I would not classify that as having recovered on a strong recovery growth at all. So as a result of that, we think that the -- in terms of the demand for loans will continue to be subdued.

Having said that, however, in areas such as the wealth management area, we continue to see opportunities for us to deepen because the liquidity in the economies continue to be very strong. And I would say the -- what we internally call the premium sector, which is the sector who has accumulated a bit of a wealth on their own as a result of their past savings, have a desire to have a higher yield on their accumulated wealth, and they also wanted to have more advice that the banks can provide them so that their return can be more sustainable, and this can take care of their future retirement as well. So we are pursuing quite a bit of activities in that end.

I would like to emphasize that when we talk about wealth management, it is not only private banking that we have in mind. We make significant amount of income and provide significant products to our customers at the -- below the private banking level. And we do do that. This would include, for example, unit trust sales, this includes banker insurance, which contains both an investment component as well as protection component. So these are the areas of which we will like to continue to deepen, as was reflected very positively in the third quarter.

In the second quarter, you understand that the clampdown has resulted in us not being able to effectively meet the customers. As a result of the digitalized channels that we have established and we have invested significantly in the past, the customers are now more used to contact us through the digital channels. Plus the gradual opening up of the economy, we are able -- both to be able to contact them via the digital channel as well as to meet them in person. So these have all combined to the fact that our effectiveness of providing our advises to the customer has resulted in their accepting some of the products that we offer them.

So once again, wealth management is not only for the private banking sector, it's also across the board. And Singapore does require these products for their own enhancing the yield as well as for their preparation of retirement. And we are focusing on this trend, which resulted in the results that we are able to deliver as you see in the third quarter.

[Anshuman Daga]

Appreciate the answer, Sam. So in terms of the wealth management you mentioned, has this been the bright spot for OCBC and the banking sector overall in the last couple of months? Or has this trend accelerated over the past quarter?

[Samuel Tsien, executive]

If you just look at the OCBC results, the contribution and the momentum in the wealth management segment has actually accelerated. You see our group wealth management income for the first 9 months of this year is actually a record high. Again, our products, which we call customer flow treasury products, which are those structured products that we do for our customers, again, was a record high. They rose by 12% year-on-year for the first 9 months of this year. So these are in the -- beneath the private banking sector, we are able to see strong growth and accelerated growth both at wealth management income and treasury income from the customer products rose to new record highs.

In the private banking sector, it also rose. The AUM hit $116 billion, and I would like to point out that $116 billion is only $1 billion below the peak private banking AUM that we had achieved, which was in December of last year. Our highest AUM was $117 billion. But at the end of the third quarter, we hit $116 billion. And this is an increase over the prior quarter as well as increase in the previous year as well.

And the equity market in -- at the end of 2009 was much higher than what we are currently seeing. But we are only $1 billion away from the peak that we saw at the end of last year. So this evidenced the activities in that sector. The bank's results is very much helped by the wealth management and the fee income growth that we are able to achieve.

[Ching Ching Koh, executive]

Okay. Do we have any other questions? Because if we don't, we will want to thank everyone for your time. Okay. Thank you very much.

[Samuel Tsien, executive]

Okay. Thank you very much for participating in this broadcast.

[Ching Ching Koh, executive]

All right. Good bye.

[Samuel Tsien, executive]

Thank you. Stay healthy.