OCBC Bank 1H22 - RHB Invest 2022-08-04: Robust NIM Expansion, Benign Credit Cost

OVERSEA-CHINESE BANKING CORP (SGX:O39)

OCBC Bank 1H22 - Robust NIM Expansion, Benign Credit Cost

OCBC’s 1H22 results were broadly in line.
More positive guidance on NIM and credit costs were tempered by our expectation of weaker non-II, resulting in modest earnings upgrade. Still, we like that asset quality remains resilient, while exposure to China’s troubled real estate sector is small, with no stress detected.

OCBC's valuation is compelling, with P/BV of < 1.0x vs improving ROEs of 10-12%. Stay BUY and S$13.90 target price, 16% upside and ~5% yield.

OCBC Bank (SGX:O39)'s 1H22 net profit of S$2.84bn (+7% y-o-y) was at 53% and 52% of our and Street FY22F earnings. Reported ROE rose to 11% (FY21: 9.6%). CET-1 stayed healthy, although lower at 14.9% (1Q22: 15.2%).
A cash dividend of S$0.28 was declared (1H21: S$0.25), representing a 44% payout.
In 2Q22, PIOP rose 13% q-o-q, boosted mainly by the 13% q-o-q jump in NII and moderate 4% q-o-q rise in opex that lowered CIR to 43.5% (1Q22: 45.6%). Bottomline growth was moderated by the 64% q-o-q increase in loan provisions, with loan credit cost at 8bps (1Q22: 6bps).

OCBC's management remains positive on FY22 outlook. Still, cognisant that headwinds from the Russia-Ukraine war, supply chain disruptions and recessionary risk have dented investor sentiment, loan growth guidance is tweaked to mid-single digit (from high-to-mid single digit). In our view, this is achievable given year-to-date-June growth of 3% or 6% annualised.

NIM expanded 26bps q-o-q in 2Q22, a positive surprise with faster transmission of rising interest rates to improved asset yields.
Notwithstanding the sharp increases in interest rates since mid-June, management expects NIM to stay at 2Q22 level of 1.81%. The guidance is conservative as management expects a further shift in CASA deposits to fixed deposits, while competition for fixed deposits would also push funding costs higher.

Non-performing assets (NPA) fell 8% q-o-q, helped by recoveries (namely oil & gas NPLs) and an upgrade of accounts in Malaysia and Indonesia where borrowers exited relief assistance. This lowered NPL ratio to 1.3% (1Q22: 1.4%), while NPA coverage is a higher 99% (1Q22: 91%).
OCBC has ~S$2.0bn exposure to China’s real estate sector. With most borrowers being network clients, and exposure to uncompleted projects small, management does not see any structural concerns.
Credit cost guidance remains conservative (lower end of 20- 25bps) as external headwinds may mean normalised provisions, and the need for additional overlays in 2H22.

Our FY22F-24F earnings forecast for OCBC are raised by 3-4%. Assumptions of better NIM and lower credit cost are partly offset by downward revision in non-II. We have also raised dividend estimates, taking into account the higher payout ratio in 1H22.
Our unchanged S$13.90 target price for OCBC is based on an GGM-derived intrinsic value of S$13.61 and a 2% ESG premium, based on our in-house methodology.
See

Singapore Research RHB Securities Research | https://www.rhbgroup.com/ 2022-08-04

SGX Stock Analyst Report BUY MAINTAIN BUY 13.900 SAME 13.900