Both Oversea-Chinese Banking Corp (OCBC) and United Overseas Bank (UOB) reported 3QFY2021 earnings which were above the expectations of analysts. OCBC reported a 19% y-o-y and a 5% q-o-q rise in net profit to $1.22 billion in 3QFY2021. UOB announced a 57% y-o-y and 4% q-o-q rise in net profit to $1.02 billion. Both banks have a December year-end.
Net interest margins (NIM) were stable for UOB 1.55%, unchanged y-o-y and q-o-q. OCBC’s NIM fell by 6bps q-o-q to 1.52%. However, loan growth of 6% y-o-y and 4% q-o-q in 3Q2021 helped to boost OCBC’s net interest income which rose to $1.46 billion, up 3% y-o-y, and unchanged q-o-q.
Darren Tan, group CFO at OCBC, says the 6bp decline in NIM was due to a one-off 2bp impact of interest reversals in Malaysia and Indonesia and from gapping income. “Good quality loans had lower yields because of excess liquidity,” Tan adds. Helen Wong, group CEO at OCBC, says she expects NIM to remain at this level.
UOB recorded a 9% growth in loans y-o-y and a modest 3% q-o-q, mainly from large corporates in Singapore and North Asia. That helped to drive its net interest income to $1.6 billion in 3Q2021, up 9% y-o-y, and 2% q-o-q.
Credit quality a lot better
Credit quality improved with overall credit costs, coming in at the lower end of banks’ guidance. For UOB, group CFO Lee Wai Fai says he expects credit quality to stabilise. However, non-performing loans ratio which stood at 1.5% of total loans could rise to 1.7% to 1.8% in 2022, Lee acknowledges.
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“The impact on credit cost will be muted. NPLs are from assets we are anticipating we think will turn bad so we have set aside general provisions (GP) so we can reverse GP to keep credit costs stable,” he explains, adding that the guidance is for 23bps. “Asean is still muted but we expect that to change next year because of more recoveries,” Lee adds.
“If the current environment is maintained, we are expecting credit cost to be at the lower end of our guidance of 100bps to 130bps for two years,” Wong says.
OCBC has a significant presence in Hong Kong through OCBC Wing Hang. Loans to Greater China of $73 billion represented 25.6% of total loans. Mainland China onshore and offshore loans made up about 11% of total loans, largely comprising lending to top state-owned enterprises (SOE), large local corporations as well as OCBC’s network customers. Mainland China’s onshore exposure is at 2% of the banking group’s loans. Of these, less than one-third are corporate real estate loans and onshore loans are largely for its network customers.
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China a source of growth
As the world’s second-largest economy, China figures large in OCBC’s overall strategy. Wong says the bank has beefed up its China transaction banking and investment banking team with new hires. She sees potential in the Chinese government’s WealthConnect programme.
“We continued to invest in our wealth platform, and it reflects in our wealth management income, wealth management fees and robust AUM growth,” Wong says, pointing to Bank of Singapore’s private bank AUM of US$123 billion ($166 billion) as at Sept 30, up 6% y-o-y.
In October, OCBC announced a partnership with Ping An Bank for China’s WealthConnect scheme. “Ping An Bank is one of the biggest banks with 300 branches in the greater bay area (GBA) and 100 million retail customers,” Wong says.
In addition, she expects that China’s ultra-high net worth and high net worth customers to set up family offices. “We want to double our relationship managers for Chinese clients to 500 by 2023,” Wong adds.
Another area of growth for OCBC is the China-Asean corridor. Wong says OCBC continues to strengthen capabilities to capture this trend by focusing on a spoke and hub model. This involves helping clients from Greater China into Asean.
On the sustainability front, OCBC is focusing on a mobility ecosystem to finance electric vehicle (EV) batteries, charging stations and EV vehicle loans. “A megatrend is sustainability and increased focus on climate change, with a lot of demand for sustainable financing,” Wong says.
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OCBC has a 25by25 target, which means $25 billion of sustainability loans by 2025. It has already committed to lending $30 billion, hence the target is likely to be reached ahead of schedule. “We are waiting for drawdown [of these loans]. And we will look at new and ambitious targets,” she says. “We want to build a leading sustainable regional bank. There are many growth opportunities we can capture.”
Volatile contributions from Great Eastern
Although OCBC’s total wealth management income rose 13% to $3.04 billion for the nine months to Sept 30, it fell q-o-q and y-o-y to $897 million because of lower contributions from Great Eastern Holdings (GEH), OCBC’s 87.9%-owned insurance subsidiary. GEH’s “accounting profit” fell by 26% y-o-y to $213.3 million in 3QFY2021 because of mark-to-market losses on its portfolio which is very sensitive to interest rates.
“We understand life insurers are impacted by market fluctuations and there might be differences in the metrics they use. We only highlight operating profit and NBEV (new business embedded value) and these are key industry metrics. GEH continues to do well. GEH is consolidated into OCBC. It is accounting profit which is reflected and there may be some volatility,” Wong acknowledges.
Although total weighted new sales or TWNS rose by 29% y-o-y in 3Q2021 for GEH, TWNS fell in Malaysia and Indonesia, which also impacted NBEV margins which declined to 31.9% from 39.7% a year ago, and 34.8% in 2Q2021.
“NBEV margins are reflective of the composition of sales. In Malaysia, because of the lockdown, there is a general decline in policy sales,” Tan says. In Malaysia, sales are mainly done through the agency force. Sales of regular premium products tend to have higher margins because of the protection element. “When we have lower sales, we have lower NBEV margins,” Tan points out.
Malaysia’s one-off tax charge
Malaysia affected UOB because it extended the period for its relief loans, but this is likely to be limited as interest-only loans were $10 million. The bigger hit is likely to be from a one-off tax charge.
According to The Edge Malaysia, the Malaysian government announced the “Cukai Makmur” on Nov 1. This is a one-off tax measure introduced by the federal government in Budget 2022, whereby earnings above the RM100 million mark will be taxed at a rate of 33%, instead of the blanket 24% rate previously.
For the nine months to Sept 30, UOB Malaysia announced an operating profit of $541 million, and for 3Q2021, operating profit was $185 million, so it is likely to be hit with a higher tax rate. In 1HFY2021 ended June 30, OCBC Malaysia reported an operating profit of $576 million before provisions. Hence it too is likely to be impacted by the Cukai Makmur.
Capital and growth
UOB’s common equity tier 1 (CET1) ratio fell by 0.7 percentage points (ppt) q-o-q, and 0.5 ppt y-o-y to 13.5% as at Sept 30. “We are comfortable with 13.5%. We can sustain CET1 with an organic growth strategy by improving return on risk-weighted assets (RoRWA), driving fee income,” Lee says. Fee income is asset-light and has higher RoRWA than loans.
“We believe our model will be enough. We want to grow quality loans. Our retail and wholesale strategy is not about loan growth but getting fee income to come in for RoRWA. Growing fee-based income which will double by 2026 will give me returns to generate [more capital],” he elaborates. NIM firming to boost net interest income is likely to be a 2023 story rather than 2022, Lee reckons. He points out to mid to high single-digit loan growth and double-digit growth in fee income to generate returns next year.
CGS-CIMB says it is neutral on the banks but has a “buy” on UOB. Despite the sterling set of results, the problem for the local banks is Sea. By the end of this month, Sea’s weight in the MSCI Singapore Free Index will increase from the current 25% to 50%. Hence, some investors expect Sea to pressure the local banks’ stock prices. The inclusion factor of Sea will increase to 100% by next February. Sea’s market capitalisation is larger than DBS, UOB and OCBC’s combined, despite still being loss-making. If its weight in the MSCI Singapore Free Index increases, investors are concerned that fund managers will reweight their portfolios in favour of Sea at the expense of the local banks.
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