OCBC CEO says recovery 'unlikely until 2021 at the earliest'

OCBC shares opened lower on Friday after the group's net profit and earnings per share fell over 40% respectively in the first quarter of 2020.

Singapore bank Oversea-Chinese Banking Corporation (OCBC) saw group net profit drop by 43% year-on-year in the first quarter of 2020, below market expectations.

For the quarter ending 31 March 2020, the group posted net profit of S$698 million, down from S$1.231 billion in the same period a year ago.

This was 26% lower than the consensus estimates of S$941 million provided by Refinitiv analysts.

Group revenue fell 7% year-on-year to S$2.49 billion from S$2.68 billion in the first quarter of 2019.

Earnings per share also fell to S$0.62 per share, a drop of 46.6% from Q1 2019’s S$1.16 per share.

No dividends were proposed this quarter by the Board of Directors.

OCBC’s share price performance: technical analysis

Shares of Singapore’s second biggest lender opened slightly lower on Friday 08 May 2020, following the release of its latest earnings.

OCBC shares are trading at S$8.84 a share as at 16:00 SGT on Friday, based on IG live data. Stocks are down 19.4% year-to-date.

Since the global stock market crash on 23 March 2020 – which saw OCBC’s equities fall to S$7.80 a share – the group’s share price has recovered over 13%.

IG Asia market strategist Pan Jingyi says OCBC's share price has been oscillating in an ascending triangle pattern since late-March. Although it has tested the resistance at around S$9.10 multiple times, it has yet to achieve breakout, she added.

‘With prices arriving at the apex of the triangle, look to a re-test of the resistance level for a breakout to open up further upsides. Rejection here could see to prices sustaining a sideway pattern of between the S$8.50 to S$9.10 channel,’ she posits.

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OCBC’s outlook for the rest of 2020: loan growth to be muted

OCBC Group CEO Samuel Tsien said during the Q1 earnings presentation that the extent of the economic fallout caused by Covid-19 remains ‘very uncertain’, adding that recovery is unlikely until 2021 at the earliest.

Excluding the forex market, he expects loan growth for the rest of this year to be muted.

He further estimates that overall cumulative credit costs over the next two years will be between 100-130 basis points (bs). He noted that this would be higher than global financial crisis levels of around 110 bps, and close to SARS levels of 143 bps.

Next, Tsien foresees that the near-term economic weakness and ongoing uncertainty will raise the bank’s non-performing loan ratio to between 2.5% to 3.5%, after factoring in the Singapore government’s relief measures.

Net interest margin compression is also expected in subsequent quarters following the full effect of interest rate cuts by central banks.

Finally, Tsien stated that management will monitor market developments closely to assess dividend payment. For now, share buybacks have also been suspended, with the priority now on supporting customers and franchise during this pandemic.

Despite the negative projections, Tsien believes that the bank is ‘well-positioned for this unprecedented crisis’.

‘I am confident that we will continue to maintain a strong balance sheet and achieve sustainable earnings as we execute our long-term corporate strategy of our diversified business model that focuses on the three business pillars,’ said Tsien.

Breaking down OCBC's Q1 2020 earnings

Banking Operations’ net profit was down 28% this quarter as income growth was offset by increased allowances.

The most significant drop came from Insurance contributions, which were down 94% to S$18 million (from Q1 2019’s S$290 million). The group said this was due to operating profit growth being offset by unrealised mark-to-market losses.

Group operating profit before allowances for this quarter was down 12% year-on-year to S$1.55 billion, with net interest margin staying flat at 1.76%, and non-interest income falling by 8.0% year-on-year to 34.7% for Q1 of 2020.

In terms of liquidity, the bank’s common equity Tier 1 ratio grew by 0.1% to 14.3% from a year ago. In shareholder assets, return on equity fell by half to 6.0% in Q1 2020 (versus 12.0% in Q1 2019).

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