OVERSEA-CHINESE BANKING CORP (SGX:O39)
OCBC Bank - North-South Winner?
Shifting supply chains, rising NIMs to drive growth
- OCBC (SGX:O39)’s 1H22 earnings were ahead of expectations. A strong uptick in NIMs contributed and we expect further improvements to flow through in 2H22. While asset quality remains benign so far, slowing macro conditions and higher borrowing costs could raise provisioning risks going forward, we believe.
- Nevertheless, OCBC’s gearing towards North-South supply chains and wealth flows provides medium term growth visibility, whilst a China re-opening could be a near-term upside catalyst.
- Raise target price for OCBC to S$14.39. Maintain BUY.
Big improvement in NIMs. Expect more.
- OCBC’s reported net-interest margin (NIM) jumped 13bps y-o-y from rising rates. 57% of the y-o-y net-interest income (NII) growth was because of higher rates pointing to the beneficial impact of rising policy rates being passed through.
- 15% of the loan book is priced on SORA – which is more responsive to rate transmission. As more of the loan book transitions to this, expect continued support for higher NIMs.
- However, we note OCBC’s low cost CASA deposits fell to 60.9% of the mix vs 63% a year ago. We expect funding costs to rise as competition for deposits heats up – especially amongst the foreign banks.
- Overall, we have raised 2022-24E NIM assumptions by 17-23bps. On the other hand, we have shaved off 1-2ppts on loan growth given expectations of slower macro conditions. Nevertheless, higher NIMs should offset this.
Asset quality stable, but risks are on the downside
- While non-performing loans (NPL) fell to 1.3% (~1.5% 2Q21), this was partly a function of recoveries/write-backs (1.7x y-o-y) from Malaysian and Indonesian customers exiting moratoriums. A repeat is unlikely in our view and we expect asset quality to fall going forward from slower macro conditions and higher interest costs.
- OCBC’s exposure to China real estate is around 0.8% of loans and Management claims these are mostly to network customers. OCBC has added some provision overlays here, but overall are comfortable with provision coverage levels following stress-tests.
- We have lowered our allowance cost assumptions by 17% for 2022E as a result, but have raised them 37-41% in 2023-24E on account of rising uncertainty.
Raise target price to S$14.39. Maintain BUY
- Our changes to assumptions sees 2022E-24E NPAT forecast for OCBC upgraded by 1-5%. We roll forward our multi-stage DDM (COE 8.4%, 3% terminal) to 2023E, and raise target price for OCBC to S$14.39 (from S$14.04).
- OCBC’s Greater Bay Strategy plus regional South East Asian presence puts it in a prime position to capture accelerating North-South supply chains and wealth flows.
- See
- The re-opening of the Mainland could be a further upside catalyst. Maintain BUY rating on OCBC.
Thilan Wickramasinghe
Maybank Research
|
https://www.maybank-ke.com.sg/
2022-08-03
SGX Stock
Analyst Report
14.39
UP
14.040
