SINGAPORE – OCBC Bank’s earnings rose in the fourth quarter of 2023 due to higher operating profit and lower allowances for potential bad loans, even as it faced increased funding costs that affected its profit margins.

Net profit for the three months to December 2023 rose 12 per cent to $1.62 billion from $1.44 billion a year ago, it said on Feb 28.

Its earnings fell short of the $1.71 billion forecast by analysts in a Bloomberg poll.

The bank’s full-year earnings grew 27 per cent to $7.02 billion as its margins increased in its key markets of Singapore, Malaysia, Indonesia and Greater China amid higher interest rates.

This marked the first time its profits crossed the $7 billion mark.

The board recommended a final dividend of 42 cents per share, up from 40 cents a year ago. The move brings total dividend for the whole of 2023 to 82 cents – an increase from 68 cents a year ago.

It represents a payout ratio of 53 per cent of the group’s net profit for 2023, in line with a previously announced target for a 50 per cent ratio.

Group chief executive Helen Wong said 2024 is likely to be a more challenging year than 2023 amid a slowdown in global growth, although Asia is expected to perform better than the global average.

“We remain watchful of impact from geopolitical economics and market developments, and of how a continued high interest rate environment may impact our customers,” she said at a briefing.

OCBC’s loans grew by just 2 per cent in constant currency terms to $297 billion in 2023 and are expected to expand by a low single-digit percentage in 2024.

However, there are still pockets of opportunities despite muted demand, in areas such as renewable energy and power and utilities as customers decarbonise their businesses, noted Ms Wong.

There is also demand from “inflation-resistant” segments, including purpose-built student accommodation and hospitality, as well as technology and digital infrastructure, she added.

The bank is also eyeing a larger slice of Asean’s market. It announced in the fourth quarter of 2023 that it will buy Indonesia’s Bank Commonwealth, and Malaysia’s AmMetLife Insurance and AmMetLife Takaful under insurance arm Great Eastern.

Bank Commonwealth will add more than one million retail and small and medium-sized enterprise customers to OCBC’s network.

The AmMetLife deal involves an exclusive 20-year distribution partnership with AmBank’s network of three million customers, which will allow OCBC to expand its insurance business and capture more market share, said Ms Wong.

OCBC’s fourth-quarter net interest income grew 3 per cent year on year to $2.46 billion, led by a 4 per cent increase in average assets.

Its net interest margin (NIM) – a key gauge of profitability – moderated by two basis points to 2.29 per cent as higher funding costs more than offset a rise in asset yields.

The bank expects a lower NIM for 2024 in the range of 2.2 per cent to 2.25 per cent, down from 2.28 per cent in 2023. 

A part of the bank’s strategy to manage its NIM lies in shoring up customer deposits in working capital accounts, which tend to be more sticky and are a cheaper source of funds.

“If your customers maintain their working capital accounts with you, they can’t place them all into fixed deposits to earn a higher interest rate, because that’s their operating capital. In the last few years, we’ve been investing digitally, in order to make sure that we capture more of these working capital accounts,” said Ms Wong.

Non-interest income grew 25 per cent to $811 million.

It was buoyed by higher net fee income, which rose 16 per cent to $460 million due to a growth in fees from wealth management, credit card and loan-related activities.

Net trading income improved 22 per cent to $222 million, driven by higher customer flow treasury income, while insurance income fell to $88 million, from $100 million a year ago.

There was also a net gain of $6 million from the sale of investment securities, compared with a net loss of $67 million in the previous year that resulted from a repositioning of the bank’s bond portfolio.

Operating expenses rose 19 per cent to $1.31 billion, partly due to higher staff costs.

Total allowances stood at $187 million, down 41 per cent from $314 million a year ago, due to a decline in general and specific provisions.

The bank’s non-performing loan ratio of 1 per cent was unchanged from a quarter ago and improved from 1.2 per cent a year ago.

Ms Wong said: “I see no particular sector of systemic stress, and I’m comfortable with the quality of our loan book.”

Compared with the third quarter, OCBC’s earnings fell 10 per cent due to a decline in insurance income and lower profits from associates. 

OCBC is the last of the local banks to report quarterly results.

Its shares fell 2.25 per cent to $13.01 on Feb 28, while DBS dipped 0.15 per cent to $33.45 and UOB dropped 0.25 per cent to $28.13.