OCBC suffers one-two punch from hefty Great Eastern losses, deteriorating O&G loans

GEH's net profit plunged 65%.

There were two main culprits behind OCBC's unexpectedly steep profit drop in the first quarter. The first is a sharp decline in insurance income from its subsidiary Great Eastern Holdings, and the second is the bank’s hefty provisions for its deteriorating oil and gas loans.

OCBC’s insurance contribution from Great Eastern plunged due to unrealised mark-to-market losses of S$108m as a result of widening credit spreads and decline in equity markets. Great Eastern’s insurance profit dropped 65% quarter-on-quarter to $85 million in Q1.

“We estimate that around 60% of the miss was due to GEH. Much lower insurance profit was almost entirely due to the disappearance of non-par gains. One might look past this if core banking trends were decent; it was not,” CIMB said in a report.

Meanwhile, DBS noted in a report that OCBC also made higher provisions of $103m on back of the continued challenging outlook for the oil & gas segment.

OCBC’s oil and gas loans amounted to $12.4bn in Q1, accounting for 6% of total loans. Although 61% of these loans are still performing, they would be classified as NPL where accounts have been restructured.

“The oil & gas segment issues have indeed deepened. Stress tests continued to be made at an oil price of US$20. The NPL ratio for the oil & gas segment is at 0.43%. This implies that the rest of the bank’s portfolio has remained relatively resilient in the current environment. OCBC’s overall NPL ratio stood at 1.0% as at end-1Q16,” DBS noted.