OCBC Bank - RHB Invest 2022-05-04: Decent Start To FY22; Stay BUY

OVERSEA-CHINESE BANKING CORP (SGX:O39)

OCBC Bank - Decent Start To FY22; Stay BUY

OCBC (SGX:O39)’s 1Q22 results are within expectations. Management remains cautious on its FY22 guidance, given the recent change in economic conditions.
We trim our target price, due to a higher risk premium and after tweaking its ESG score to 3.1 (from 3.2) – as we recalibrated the assessment of risks and regulatory requirements associated with data and cybersecurity. At a current P/BV of 1.1x, OCBC’s risk-reward ratio remains compelling.

Stay BUY, new S$13.90 target price for OCBC from S$14.40, 12% upside with 4% FY22F yield.

OCBC's 1Q22 net profit of S$1,356m (+39% q-o-q, -10% y-o-y) was at 24%/25% of our/Street FY22F earnings. Reported ROAE improved to 10.6% (FY21: 9.6%) while CET-1 was relatively stable at 15.2%. 1Q22 PIOP fell 19% y-o-y as non-II declined 23% on lower wealth management fees (-20%), trading income (-29%) and life insurance profit (-34%), and negative JAWs as opex grew 5%. NII rose 4% y-o-y on 8% y-o-y loan growth and stable NIM.
The 63% y-o-y drop in provisions, with loan credit cost at a low 6bps (1Q21: 22bps), moderated the fall in net profit.

While acknowledging near-term headwinds from the Russia-Ukraine war, the China lockdown and rapid rise in inflation, OCBC's management believes Asia will remain resilient – helped by the reopening of economies.
Loans grew 1.4% year-to-date or an annualised 5.6% in 1Q22, ie at the lower end of its FY22 target of mid-to-high single-digit growth. Loan growth is expected to gain momentum in 2H, as was the case in FY21.

OCBC's management expects NIM at 1.55-1.60% in FY22, a slight upgrade from its earlier guidance of 1.50-1.55% (FY21: 1.54%). Management is conservative on its guidance, as it sees some uncertainty in the transmission of US interest rate hikes to Singapore’s benchmark rates. Hence, NIM could surprise on the upside.
OCBC estimates that a 100bps hike in the US rates would add S$670m to NII and 14bps to NIM.

OCBC did not provide specific guidance on non-II growth. Management plans to increase the hedging of its investment portfolio (~70% in 1Q22) to mitigate the impact of non-customer treasury flows. With investors cautious over risks of recession, it sees challenges to the expectations for double-digit growth in wealth management fees. The wealth management unit contributes ~50% of net fee income.

OCBC’s loan book remained resilient in 1Q22 with no material weakening. Non-performing assets (NPA) dipped 0.7% q-o-q, nudging NPL ratio to 1.4% from 1.5% in Dec 2021, while NPA coverage was at a comfortable 91%.
Still, OCBC's management is sticking with its credit cost guidance of 20-25bps for FY22F (FY21: 29bps), preferring to be cautious.

We cut FY22-24F net profit forecast for OCBC by 4-5% after factoring in lower NIMs, non-II and higher provisions. Our new S$13.90 target price for OCBC (from S$14.40) takes into account a higher equity risk premium and a lower 2% (from 4%) ESG premium, based on our in-house ESG methodology.
See

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2022-05-04

SGX Stock Analyst Report BUY MAINTAIN BUY 13.90 DOWN 14.40