Although OCBC’s net interest income was lower y-o-y and q-o-q, it managed to outstrip its net profit estimate of $1.88 billion by 1% because of growth in non-interest income.
“Our 15% increase in non-interest income compensated for the lower net interest income (NII). Wealth management income and assets under management were at record highs. Wealth management income was 29% above the last quarter at $1.37 billion. It now contributes more than a third or 38% of our group's total income,” says Goh Chin Yee, OCBC’s group CFO.
OCBC’s NII declined by 4% q-o-q and y-o-y to $2.345 billion due to lower net interest margin (NIM) which contracted by 11 basis points (bps) to 2.04%, as loan yields tightened at a faster pace than deposit costs. OCBC also set aside more general provisions due to the uncertainties caused by the Trump administration’s Liberation Day. Total credit costs rose to 24 basis points as general provisions rose to $118 million.
“We adopted a prudent approach to set aside additional pre-emptive allowances in view of the current macroeconomic uncertainties and heightened geopolitical tensions,” Goh says. The elevated general provisions are not because of weaker credits, but a pre-emptive move to set aside more provisions as overlay. The macroeconomic variable (MEV) model is updated every quarter according to Goh. MEV models are a guide to the general provisions banks need to set aside whereas overlays are additional provisions over and above what the model requires.
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A 3% first order impact on loan book
During a results briefing on May 9, group CEO Helen Wong said that trade tariffs are likely to have a “first order impact of 3% on our loan book”. We further stress tested our portfolio for potential vulnerability and assessed that our portfolio remains resilient.”
The sectors in the first order impact are likely to transportation, manufacturing, and generally the production of goods, Wong points out. The second order impact could be tariffs on pharmaceuticals, wholesale traders, commodities perhaps. The third order impact would be defensive sectors geared towards domestic consumption including services.
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Interestingly, in 1QFY2025, OCBC’s non-interest income was able to underpin the group’s earnings. Non-interest income, in particular fees from trade loans and wealth management are not capital intensive; they do not require additional risk weights such as loans. In some quarters, fee income from wealth management is viewed as the holy grail for banks.
Be that as it may, fee income is not as annuity-like as net interest income where loans that are disbursed need to be serviced regularly. Fee income is derived from selling products for wealth management, stock broking, treasury sales, and for hedging and trading activities. These services sometimes depend on market volatility. For instance in April, when stock, bond and currency markets turned volatile, customers tended to trade more which also results in increased hedging activities providing the group with additional fees.
In 1QFY2025, OCBC’s trading income rose by 7% y-o-y and 31% q-o-q. DBS’s trading income was more spectacular, up 48% y-o-y and more than 100% q-o-q. UOB’s trading and investment income fell 12% y-o-y but rose 27% q-o-q.
Although trading income is ephemeral, rising fee income is positive for shareholders with related positive implications. Because fee income is capital-light, it can boost ROE. It has a positive impact on earnings without requiring banks to raise their RWA, hence fee income is positive for earnings accretion. More capital means higher dividends either through an ordinary dividend payout or a return of capital.
Wong is maintaining her 2025 guidance for financial targets such as NIM at around 2%, mid-single digit loan growth although this depends on what happens in the second half, credit costs at 20-25bps and a 40% cost-to-income ratio.
“We remain committed to deliver the 60% dividend payout ratio which we have announced, coupled with our share buybacks over a two year period,” she says.
