What went wrong in OCBC's poor profits in 2Q

Insurance earnings went missing.

According to CIMB, it sees OCBC’s glaring miss in 2Q as a reflection of its susceptibility to falling bond markets. Insurance earnings went missing as non-par losses streamed in. Its AFS surplus also shed S$499m, like the other banks. Without insurance, 2Q ROE dipped to a poor 9.9%. 

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Non-interest income (S$606m vs. CIMB’s expectation of S$727m) as a whole came in 17% below our expectation. This was despite in-line fee and trading income.

Decent wealth management, trade and loan-fee momentum suggest that core banking trends were fine. The big swing factor was, of course, insurance.

After consecutive quarters of non-par gains from GEH to prop up its earnings, 2Q reflected a period when bond yields spiked, GEH non-par losses showed up and insurance earnings almost went missing.

Management says that part of the non-par losses had been recovered in Jul but we think that is scant consolation.

Today, OCBC’s earnings seem to be the most volatile to market swings. With the potential for interest rates to normalise further, we think 2Q is a good reminder about what can happen to OCBC’s earnings when long-end interest rates rise meaningfully.

We appreciate the long-term attraction of its insurance business, with NBEV up 20% yoy and total weighted new sales up 34% yoy – all extremely strong. However, we just find it difficult to look past its poor headline numbers.

The disappearance of insurance earnings was the main reason for 2Q ROE to dip to 9.9%. The P&L hit was market-driven and from OCBC’s insurance arm.

That was not the only impairment though. OCBC also chalked up S$499m of AFS losses (14.5Scts/share) in 2Q, although to be fair, all three banks’ AFS was hit hard this quarter.

Higher costs secondary reason for sub-par 2Q. The secondary reason for the poor 2Q was expenses, which rose marginally ahead of our expectations. Overheads rose 7% qoq on a 5% headcount increase over the year and salary adjustments from Apr.