OCBC's asset quality remains under threat

Exposure to oil & gas sector estimated at 6%.

Outlook for OCBC remains uninspiring despite reduction in new non-performing loan (NPL) formation in 3Q, said DBS Group Research.

"Although the new NPL formation has reduced during the quarter, the peak is far from near. More negotiations are expected to emerge from the oil & gas sector, hence new NPL formation would still be prevalent. Management hinted that NPL ratio would unlikely hit the high of 2.1% that it recorded at the peak of the Global Financial Crisis (GFC)," it said.

The research house added that the SME portfolio will be closely monitored as this segment tends to be vulnerable in a prolonged soft economic environment.

"The focus in 2016 would likely be on managing expenses and containing asset quality. Loan growth is expected to be at low single digits while NIM would likely stay flat at current levels," it said.

According to DBS Group Research, higher credit costs are imputed given the vulnerability of its oil & gas exposure which currently stands at 6% of total loans.

OCBC's 3Q16 earnings were lifted by better insurance and wealth management income. NIM slipped by 2bps while loans grew 2% q-o-q (-2% y-o-y) while expenses remained well controlled.

Provisions (both general and specific provisions) were higher. One-third of specific provisions were related to the oil & gas sector.

New NPL formation eased to S$497m (2Q16: S$924m), 43% of these were from the oil & gas sector. 60% of its oil & gas NPLs are still performing, currently servicing either interest
or principal or both.

NPL ratio rose to 1.2%. Excluding the oil & gas sector, NPL ratio was largely stable at 0.7%. Separately, capital ratios remained strong.