SINGAPORE — Oversea-Chinese Banking Corp (OCBC), Singapore’s second largest lender, yesterday reported a steeper-than-expected 17.8 per cent decline in fourth-quarter net profit, hurt by surging provisions for bad loans in the oil and gas sector.

Net profit for the three months ended Dec 31 plummeted to S$789 million from S$960 million in the corresponding period a year earlier, OCBC said in a pre-market statement filed with the Singapore Exchange. This was well below the average forecast of S$856 million, or a 10.8 per cent decline, from analysts polled by Reuters.

Net interest income fell 7 per cent to S$1.25 billion, due to lower net interest margins from the continued compression in loan yields, OCBC said, while net allowances for loans and other assets jumped 57 per cent to S$305 million. Non-interest income was down 4 per cent at S$926 million as fee income growth was more than offset by lower net trading income and life assurance profit.

“The overall quality of our portfolio remained sound. Against the weak operating environment, however, there continued to be stresses in parts of the portfolio, particularly within the oil and gas support services sector which drove increases in non-performing loans and allowances,” OCBC Chief Executive Samuel Tsien said in the statement.

Mr Jeremy Teong, analyst at Phillip Securities, said: “We did not expect OCBC’s bad loan provisioning to accelerate to this level in a quarter. What is also a cause for concern is the bank’s inability to increase its interest income given the current unfavourable loan volumes and rate dynamics.”

“Over a period of time, banks would have been adjusting or even cutting their exposure to the oil and gas industry. But, apart from higher impairment charges for loans to the battered oil and gas industry, interest margins in general continue to be weak given poor loan volume and rate dynamics. This will impact the total income and earning ability of banks in general,” he added.

At the earnings briefing yesterday, Mr Tsien warned of further pressure from the beleaguered oil sector.

“The stress situation is going to continue. We need to see oil above US$60 (S$85) per barrel on a sustainable basis to trigger the oil majors to go out and explore, and for the charterers to enter into longer term vessel chartering contracts. Before that happens, it is hard to say that it is the end of a difficult period for our clients ... For the period of the next six months, there will continue to be volatility, uncertainty and more distress,” he said.

Benchmark Brent crude, which has traded between US$40.61 and US$59.02 a barrel over the past year, was changing hands at US$56.04 late yesterday in Asia, Bloomberg data showed.

For the whole of last year, OCBC’s net profit slumped 11 per cent from the year earlier to S$3.47 billion, as net interest income fell 3 per cent to S$5.05 billion. This was due to a rise in net allowances and lower trading and insurance income, which more than offset the impact of strong wealth management fee income growth and increased contributions from the Indonesia and Hong Kong banking subsidiaries, OCBC said. Allowances for loans and other assets in 2016 surged 49 per cent to S$726 million due to higher provisions for corporate accounts in the oil and gas support services sector.

OCBC’s board proposed a final tax-exempt dividend of 18 cents per share, bringing the full-year 2016 total dividend to 36 cents per share, unchanged from the year earlier. OCBC was first of the three Singapore banks to report earnings; larger rival DBS and UOB are scheduled to announce their fourth quarter results tomorrow and on Friday, respectively. Following the results announcement, OCBC shares fell 3.3 per cent to S$9.43, DBS shares slipped 3.4 per cent to S$18.26 while UOB lost 1.6 per cent to S$20.74, helping to drag the Straits Times Index 1.3 per cent lower to close at 3,072.47.