OCBC Bank - UOB Kay Hian 2022-05-04: 1Q22 On A Stronger Footing


OCBC Bank - 1Q22 On A Stronger Footing

  • OCBC's 1Q22 results exceeded expectations due to a strong contribution of S$330m from insurance, net trading income of S$225m and lower credit costs of only 6bp. New NPL formation has normalised and NPL ratio has improved 0.1ppt q-o-q to 1.4%. Interest rates are on the rise and we expect NIM to improve to 1.58% in 2022 and expand 13bp to 1.71% in 2023. 2022 P/B is low at 1.05x.
  • OCBC provides attractive dividend yields of 4.5% for 2022 and 4.8% for 2023. Maintain BUY. Target price: S$14.88.

OCBC's 1Q22 Results

  • OCBC (SGX:O39) reported net profit of S$1,356m for 1Q22 (down 10% y-o-y but up 39% q-o-q), above our forecast of S$1,110m.
  • Growth from Singapore and developed markets. Loans expanded 8% y-o-y and 1% q-o-q in 1Q22. The sequential expansion was driven by Singapore, the UK, Australia and the US. OCBC supported its network customers in expansion overseas to acquire logistics, data centre and student accommodation properties. Europe (ex-UK) accounted for less than 1% of total loans. NIM expanded 3bp q-o-q to 1.55%, benefitting from the 25bps hike in Fed Funds Rate in March and the associated increase in loan yield.
  • Customer deposits grew 10% y-o-y and CASA ratio improved 0.9ppt y-o-y to 62.7%.
  • Risk appetite affected by Russia-Ukraine war. In 1Q22, fees declined 11% y-o-y but remained flat q-o-q. Contribution from wealth management dropped 20% y-o-y but rose 3% q-o-q. High net worth clients have turned cautious as they see headwinds from the Russia- Ukraine war and heightened geopolitical tensions. AUM grew 1% y-o-y to S$251b.
  • Contributions from life and general insurance remained resilient at S$330m in 1Q22, down 30% y-o-y (from last year’s high base) but rose 10% q-o-q. It benefitted from mark-to-market gains from a decline in insurance contract liabilities due to utilisation of a higher discount rate to value these liabilities. Net trading income was also strong at S$225m.
  • Contribution from Bank of Ningbo increased 22% y-o-y to S$254m.
  • Cost efficiency improved sequentially. Operating expenses increased 5% y-o-y but receded 7% q-o-q in 1Q22 (lower discretionary spending and absence of one-off operational charges compared to 4Q21). Staff costs increased 7% y-o-y.
  • NPL formation normalised after taking a hit in 4Q21. New NPL formation was S$296m in 1Q22, significantly lower than S$1,057m in 4Q21 (COVID-19 pandemic caused delays to syndicated project financing in Greater China). NPL balance declined slightly by 0.7% q-o-q due to recoveries and upgrades of S$240m mainly from the offshore support vessel (OSV) sector in Singapore. NPL ratio improved 0.1ppt q-o-q to 1.4%. Total provisions were 73% lower y-o-y at only S$44m as OCBC had already set aside sizeable provisions for corporate loans in 4Q21.
  • Three-year strategy refresh. OCBC plans to tap on four growth drivers:
    • rising wealth in Asia through hubs in Singapore and Hong Kong,
    • ASEAN-China trade and investment flows,
    • new economy and high-growth industries, and
    • transitioning to a sustainable low-carbon world.
  • It will invest to strengthen its comprehensive regional franchise and accelerate digital transformation.

Positive outlook for ASEAN countries.

  • ASEAN countries remain resilient and will benefit from easing of safe distancing measures and resumption of air travel. In particular, Malaysia and Indonesia gain from recovery in domestic consumption and higher energy and commodity prices. Many multinational companies have adopted the China + 1 strategy and have plans to set up alternative production facilities within the ASEAN region.
  • Management will closely monitor the COVID-19 outbreak in Greater China. It serves Chinese customers’ offshore activities with loans booked in Singapore and Hong Kong (9% of total loans). Its onshore exposure to Mainland China is small at only 2% of total loans.

OCBC's guidance for 2022.

  • Management guided mid-to-high single-digit loan growth for 2022. The magnitude of loan growth depends on whether higher inflation affects customers’ expansion plans and how severely economic growth slows down in response to higher interest rates. NIM is expected to be higher at 1.55-1.58% (2021: 1.54%). Credit costs are expected to be 20-25bp (2021: 29bp).

Sensitivity to rate hikes.

  • According to OCBC’s annual report 2021, it is estimated that a 100bp parallel upward shift in yield curves for four currencies, Singapore dollar, US dollar, Hong Kong dollar and Malaysian ringgit, will lead to NIM expansion of 18bp and additional net interest income of S$669m.

SMS phishing scam.

  • OCBC has made one-off goodwill payouts to the victims of the SMS phishing scam totalling S$14m in 4Q21. It has beefed up fraud prevention and implemented security measures set out by Monetary Authority of Singapore (MAS) and Association of Banks in Singapore (ABS).
  • OCBC has rolled out a kill switch that enables customers to immediately freeze all their current and savings accounts in an emergency. It has established a dedicated team and set up a hotline to assist customers encountering possible fraud.

OCBC - Earnings forecast revision & Recommendation

  • We expect successive hikes of 50bp during the upcoming FOMC meetings on 3-4 May and 14-15 June. We have factored in the impact of Fed Funds Rate rising to 2.5% by end-22. We expect NIM to improve to 1.58% in 2022 and expand 13bp to 1.71% in 2023. We forecast earnings growth of 8.6% in 2023 and 6.5% in 2024.
  • We raised our 2022 net profit forecast for OCBC by 4% primarily due to the better-than-expected 1Q22 financial performance. We trim our 2023 net profit forecast by 1% after adjusting credit costs slightly higher by 1bp to 24bp.
  • Maintain BUY. Our target price of S$14.88 for OCBC is based on 1.20x 2023F P/B, derived from the Gordon Growth model (ROE: 9.8%, COE: 8.25%, growth: 0.5%).
  • See

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-05-04
SGX Stock Analyst Report BUY MAINTAIN BUY 14.88 DOWN 15.050