UOB announced its Q3 results this morning which gives a big hint of what is to come for the other two banks.
The drop in NIM and increase in NPA is worst than expected, and if not for the loan growth segment in the Singapore that helps, it might look like a worsen Q3.
OCBC is scheduled to announced its results on the 5th Nov (Tuesday morning) before the start of market trading.
This is 5 reasons why I think OCBC Q3 FY19 profit results are going to fall double-digit in terms of percentage year on year.
1.) Net Interest Margin Compressed QoQ and YoY
In FY18, OCBC’s Net Interest Income contributes 60% to their total revenue while Non-Interest Income contributes the rest of the other 40%, so we’ll approximately use that as a gauge.
Q2FY19 Net Interest Income came in at $1,588m while Q3FY18 Net Interest Income came in at $1,505m.
This was when Net Interest Margin at 1.79% (Q2FY19) and 1.72% (Q3FY18) respectively.
Given UOB’s earlier results today which Net Interest Margin has dropped by 4 basis points in Q3FY19, I expect OCBC to do the same in Q3FY19 for the NIM to drop to around the 1.75% range.
The only saving grace is a higher loan growth, if they can replicate what UOB does, but from the Q2FY19 results, loan growth seems to already slowed down to low single digit.
2.) Non-Interest Income to fall YoY
OCBC’s Wealth Management segment is the likely savings grace as they continued to expand in this area and it contributes half the revenue of the overall Non-Interest Income business.
Q3FY18 Wealth Management fees came from a low base of $217m, so it is likely that the revenue from this segment will contribute positively when comparing year on year because of the increase in AUM. However, it will be difficult to match against the higher base of Q2FY19, which stands at $261m and a higher fee base.
3.) Great Eastern Insurance Business to fall YoY
The Group’s insurance subsidiary, Great Eastern announced its Q3FY19 results earlier last week.
Profit attributable to shareholders for Q3FY19 is at $205m as compared to $213m, which is a drop of about 4% year on year.
The lower profit in Q3 is due to higher valuation of insurance contract liabilities as a result of decline in discount rate.
4.) Higher Allowances and NPA Due to Higher Credit Costs
Based on UOB’s latest results, we know that total credit costs on loans for Q3FY19 ticked up to 23 basis points from a low of 8 basis points in Q2FY19. That is a variance of 15 basis points in one quarter.
OCBC’s Total allowances for loans for Q3FY18 came from a low base of $49m while in Q2FY19 it ticked up to $111m.
I’m expecting allowances to further deteriorate and increase in Q3FY19 to around $150m minimally.
5.) Cost-to-Income (CIR) to Increase
UOB’s CIR has unexpectedly increase in Q3FY19 to 44.2%, which is up from 43.4% YoY and 43.7% QoQ.
The increase is due to more staff headcount hiring as they open more branches and going into personalized digital banking, and we might see the same happening too for OCBC and DBS as they are trying to increase their investment capex over time.
Final Thoughts
UOB should report the strongest result of the three banks due to their positioning in the regional but it didn’t really materialize in Q3. In fact, the results are mostly up due to the decent loan growth segment in Singapore, especially in the construction and manufacturing sectors.
But you can see these loans growth slowing down, especially when you compare the loans in Sep 19 vs Jun 19, and that they didn’t rise a lot.
With volume growth slowing down and NIM coming down, it will be a double whammy for the banks in what to be a challenging next few quarters, especially if allowances also start to tick up.
In this regard, I am expecting OCBC’s Q3FY19 results to trend pretty similar to what they’ve been reporting for Q2FY19, which comes in at $1,249m but at higher operating expenses because of the higher allowances while muted growth in the loans and wealth management segment.
When comparing this with last year profit of $1,271m, we could yet see a surprise fall in profit in this Q3 for OCBC when comparing both YoY and QoQ.
Thanks for reading.
Interesting write-up. Although I do not follow the banks closely, do you think the performance of Wing Hang Bank in HK will also have an impact on OCBC's earnings as well going forward?
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