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OCBC Q1 results show energy exposure remains a risk

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OCBC Q1 results show energy exposure remains a risk

Stress in the oil and gas sectorremains a worry for Oversea-Chinese Banking Corp. Ltd., after the No. 2 Singaporean lender first-quarter profit that was weighedon by ballooning loan-loss allowances.

Resultsfor 2015 at the three biggest Singaporean lenders concerns about the impact of badloans, particularly impairments of credit to oil and gas companies in theAsia-Pacific energy hub that are vulnerable to the prolonged industry downturn.Nonperforming loan ratios climbed at all three of them in 2015.

Thelatest quarterly earnings added to those worries for OCBC. The lender on April29 a 14% year-over-year declinein net profit for the first quarter, with loan-loss allowances more thandoubling to S$167million. Thecompany reported an NPL ratio of 1.0%, up from 0.6% a year earlier,highlighting weakness among oil and gas companies as a key reason for theincrease.

OCBCwill continue to work with customers to avoid defaults, focusing on offshoreservice firms that make up 45% of the bank's S$12.4 billion exposure to the oiland gas sector, CEO SamuelTsien said at abriefing after the earnings release.

Thejump in provisions reflects "a conservative approach" that the bankwill continue to adopt, he said.

Smallerrival fared better in the firstquarter, with net profit 4.4%. Althoughallowances for specific loans grew 15.2% to S$133 million, which the companyattributed to commodity-related NPLs, total coverage decreased more than 30%during the January-March period from a year earlier.

Theloan portfolio of the third-largest Singaporean bank by assets is lessconcentrated on the energy sector, according to Kevin Kwek, a Singapore-based analyst at Sanford C.Bernstein.

"UOB'sasset quality was better," Kwek said.

Eyeswill now turn to Singaporean lender , which reportsMay 3.

AlthoughSingaporean banks as a whole have strong fundamentals, including sufficientcapital buffers, they will face challenges in boosting profit and maintainingasset quality, said Ivan Tan, an analyst at S&P Global Ratings.

S&PGlobal Ratings and S&P Global Market Intelligence are owned by S&PGlobal Inc.

On onehand, loan growth has weakened, particularly with trade finance to China, whichonce benefited from lower funding costs in offshore yuan, fizzling out, Tansaid. Asset quality, on the other, will continue to deteriorate in 2016, if slightly,mostly because of commodities-related loans, he said. Yet, any increase in NPLratios would be manageable for banks in Singapore as they are still at lowlevels.

Loansat OCBC decreased about 10% in the first quarter from a year earlier, with thosetied to Greater China, which accounted for about a quarter of the total as ofMarch 31, shrinking more than 9%.

Netinterest income at OCBC still rose 5% year over year in the first quarter, asmargins improved, but Tsienoffered a bearishoutlook.

"Loangrowth will be quite subdued," hesaid.

In thefirst three months of 2016, OCBC was further hit by mark-to-market losses fromsecurities investments at its insurance unit, That showsthe risk of directly holding a stake in an insurer, something DBS can avoidwith a major bancassurancedeal with

"Manulifeis fees only," Kwek said.

Amongfee-generating businesses, wealth management could be a bright spot for OCBC, said Matthew Phan, an analyst at CreditSights. In a bid to build scale in aconsolidating market, the company earlier in April to purchase 's private bankingoperations in Hong Kong and Singapore.

As of April 28, US$1 wasequivalent to S$1.35.