The Shock continues.. with OCBC disclosing its $221m write-down

Nov 7, 2007

OCBC shocks with huge $221m in write-downs
Figure is three times what DBS is setting aside to cover fallout from risky debt

GOOD SHOW: Operationally, OCBC put in a solid performance, with a 12 per cent rise in net profits for the third quarter ended Sept 30.

OCBC Bank has delivered a shock with a far bigger-than-expected $221 million write-down on its portfolio of investments exposed to the United States sub-prime property mortgage crisis.

The bank said it is being extra prudent given market conditions, and added that the assets involved are of investment quality.

Still, the write-down is more than three times what DBS Group Holdings is setting aside to cover any fallout from risky debt holdings. DBS has the biggest direct exposure to so-called collateralised debt obligations (CDOs) - products packaged from risky mortgages in the US.
OCBC's write-down implies an 82 per cent write-off on its asset-backed securities portfolio, said Singapore's No.3 bank.

Operationally, OCBC put in a solid performance, with a 12 per cent rise in net profits for the third quarter ended Sept 30.

The bank's chief executive, Mr David Conner, said that while there has been some downgrade in its CDO portfolio, it is still of investment grade quality.

This news comes on the back of billions of dollars of writedowns by global financial giants Merrill Lynch and Citigroup, which sent financial markets and investors reeling.

Analysts weighed in on OCBC's disclosure yesterday.

'I don't think you can say they were conservative,' Daiwa Institute of Research analyst David Lum said. 'There could be some subjectivity as to how each bank would value those holdings, and then the other consideration is that perhaps the quality of OCBC's holdings is not as good as the others.'

This view was not shared by some other analysts. Cazenove analyst George Koh said OCBC chose to make a 'wise decision' in writing down its portfolio aggressively. 'We tend to believe OCBC's portfolio is not inherently more risky compared to those of the other two local banks.'
Mr Conner said the chances of more write-downs in the fourth quarter are low.

Aside from CDO-related issues, OCBC's underlying profit growth remains strong, boosted by healthy rises in net interest income and non-interest income.

Net income rose to $463 million in the third quarter ended Sept 30, from $379 million a year earlier, beating analyst expectations of about $417 million.

Net interest income - what a bank earns from borrowers after paying interest to depositors - rose 19 per cent to $565 million. Growth was driven by a surge in interest earning assets - mainly in loans to corporations and small and medium-sized firms in Singapore, Malaysia and Indonesia.

Non-interest income, which includes stockbroking commissions, fund management fees and credit card charges, surged 35 per cent to $481 million.

OCBC said operating expenses rose 28 per cent year on year to $427 million due to higher staff costs and business promotion expenses.

The cost-to-income ratio for the third quarter was 40.8 per cent, compared with 40 per cent in the same period a year ago.

Earnings per share for the third quarter rose from 47.5 cents to 53.4 cents. Net asset value per share, before valuation surplus, was $4.72, up from $3.90.

OCBC shares have gained 15 per cent this year, outperforming those of United Overseas Bank and DBS.

Source: The Straits Times