OCBC share price: what to watch out for ahead of its Q2 results

Singapore’s Oversea-Chinese Banking Corporation (OCBC) bank will be announcing its financial results for the second quarter of 2019 on Friday (August 2, 2019), before the market opens.

The bank is the second-largest bank in Southeast Asia by total assets, after rival DBS Group Holdings. OCBC is the longest-established Singapore bank, formed in 1932 from the merger of three local banks, namely the Chinese Commercial Bank, the Ho Hong Bank and the Oversea-Chinese Bank.

According to OCBC’s website, the bank’s key markets are Singapore, Malaysia, Indonesia, and Greater China. It has more than 560 branches and representative offices in 19 countries and regions.

OCBC owns an insurance arm, Great Eastern Holdings.

OCBC posted an 11% increase in net profit for the previous quarter

The bank reported an 11% increase in net profit for the first quarter, at S$1.23 billion, from S$1.11 billion a year ago, which had overshot analysts’ expectations of a S$1.16 billion profit.

Total income gained 15% from a year ago to S$2.68 billion while net interest income was up by 8% to S$1.53 billion.

A higher asset yield in a rising interest rates environment helped net interest margin rise by 9 basis points to 1.76%.

OCBC share price up 3.9% year-to-date

Based on Monday’s (July 29, 2019) price of S$11.70, shares of OCBC have risen by 3.9% year-to-date, from S$11.26 on January 1, 2019.

Similar to other bank stocks, OCBC’s shares have made a comeback from three years ago, broadly supported by loans growth. In 2016, OCBC’s shares had plunged to S$8.00-levels amid the headwinds faced due to exposure to the oil and gas industry.

“Watchful” on trade developments, regional elections results

In the previous earnings report, OCBC’s chief executive Samuel Tsien said the bank will continue to stay watchful of the progress of trade negotiations between the United States (US) and China, developments in financial markets and conclusion of a number of elections in the region.

Tsien said that the bank’s strong first quarter 2019 results “demonstrated” the underlying strength of the group’s banking, wealth management and insurance franchise which drove its operating profit to a new high.

The group’s insurance segment operating profit for the quarter made up 24% of total operating profit for the first quarter, up from 13% a year ago.

Slow economic growth to put a brunt on future earnings

Meanwhile, Singapore banks are likely to face a challenging outlook ahead with the local economy at a growth that is at the slowest annual pace in a decade.

The Singapore economy fell below expectations for the second quarter with a mere 0.1% increase year-on-year, preliminary data from the Ministry of Trade and Industry revealed this month.

Dovish inflation landscape likely to impact margins

The boost in earnings provided by higher interest rates is likely to fade following the US Federal Reserve’s (Fed) dovish tilt in stance, a situation which will cause Singapore banks to be more reliant on fee income.

The US Fed is expected to cut interest rates this month and markets are predicting for a 25 basis point cut. Analysts are forecasting for either one or two more rate cuts this year, bringing interest rates back to where they were in May 2018.