How Did Oversea-Chinese Banking Corporation Limited (SGX: O39) Perform for 2020?

One of Singapore’s three listed banks, Oversea-Chinese Banking Corporation Limited (SGX: O39) (OCBC), just released its earnings for 2020.

Here are some quick points to note from the bank’s latest financial results.

1. Total Income

OCBC reported a total income of S$10.14 billion in 2020, down 7% year-on-year. The decline came on the back of lower net interest income and non-interest income.

Net interest income fell 6% year-on-year to S$5.97 billion.

The fall in net interest income was due to a drop in net interest margin (from 1.77% in 2019 to 1.61% in 2020) amid a lower interest rate environment and a lower loans-to-deposits ratio (down from 86.5% to 83.7%) on the back of strong deposits growth.

The net interest margin shows the average interest margin that a bank earns from its borrowing and lending activities while the loans-to-deposits ratio measures a bank’s liquidity.

Meanwhile, non-interest income decreased 8% year-on-year to S$4.17 billion.

The following chart shows a breakdown of non-interest income performance in 2019 and 2020:

2. Operating Profit Before Allowances

Operating expenses fell 4% due to lower staff costs and reduced discretionary spending as expenses were controlled tightly.

With that, OCBC’s operating profit before allowances tumbled 7% year-on-year to S$6.31 billion.

3. Allowances 

Total allowances for 2020 surged 130% to S$2.04 billion, up from S$890 million a year ago. The rise was largely due to higher allowances set aside for non-impaired assets.

OCBC’s non-performing loan (NPL) ratio for 2020 was stable at 1.5% (compared to a year ago).

On a quarter-on-quarter basis, the NPL ratio improved from 1.6% at end-September 2020.

The NPL ratio shows the amount out of the total loan that a borrower is unable to pay off interest or principal amount.

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4. Net Profit

OCBC’s net profit in 2020 was S$3.59 billion, down 26% as compared to S$4.87 billion a year ago. Diluted earnings per share came in at 0.80 Singapore cent, down from 1.12 cents in 2019.

The poor showing was due to the lower net interest margin and higher expected credit loss allowances to buffer against deterioration in macroeconomic conditions.

However, on a quarterly basis, the bank’s net profit grew for three consecutive quarters in 2020 and its fourth-quarter net profit was the highest for the year.

The improvement came on the back of better operating conditions.

5. Balance Sheet Strength

Now, let’s look at two ratios that measure the ability of a bank to meet its financial obligations.

OCBC’s Common Equity Tier 1 ratio at the end of 2020 stood at 15.2%, an improvement from 14.9% seen a year ago. The minimum regulatory requirement is 6.5%.

Its leverage ratio was stable at 7.7%, well above the minimum requirement of 3%.

6. Dividend

OCBC has declared a final dividend of 15.9 Singapore cents per share, in line with the Monetary Authority of Singapore’s call for local banks to moderate their dividends for 2020.

Overall for 2020, OCBC would be paying out a total dividend of 31.8 cents per share.

OCBC’s dividend payout ratio for 2020 is a conservative 39%. This shows that there’s room for dividend growth once the MAS dividend cap is removed.

The scrip dividend scheme will be applicable for OCBC’s fourth-quarter dividend, with scrip dividends issued at the average of the closing share prices between 12 May 2021 and 14 May 2021. There will be no discount offered for the scrip dividend. OCBC will announce the scrip issue price on 17 May 2021.

7. Business Outlook

OCBC is aware that there’s a gradual improvement in consumer sentiments and business confidence.

However, it also sees a need to remain cautious as uncertainty still persists.

OCBC’s group chief executive, Samuel Tsien, commented:

“While economic conditions have started to show signs of stabilisation and we are seeing increased activities in some pockets of the economy, the recovery is not yet broad-based. The uncertainty of COVID-19 containment globally continued to weigh on business confidence and consumer sentiments. We will remain watchful of the headwinds, but we are also looking for opportunities to capitalise on signs of sectorial recovery.

When the markets turn, our strong capitalisation, funding and liquidity will provide us with ample capacity to invest and to grow, and we look forward to putting them to work.”

At OCBC’s current share price of S$10.92, it has a price-to-book ratio of 1x, a price-to-earnings ratio of 13.7x, and a dividend yield of 2.9%.

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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the company mentioned.