OCBC Bank - UOB Kay Hian 2022-08-04: 2Q22 Higher CASA Ratio Enhances Sensitivity To Rising Interest Rates


OCBC Bank - 2Q22 Higher CASA Ratio Enhances Sensitivity To Rising Interest Rates

  • OCBC demonstrated heightened sensitivity to rising interest rates with NIM growing 16bp q-o-q to 1.71% in 2Q22 aided by:
    1. strong pass-through from the Fed’s rate hikes to domestic interest rates, and
    2. strengthened funding franchise with CASA ratio improving 13ppt to 60.9% over the past three years.
  • This is the second consecutive quarter of excellence in execution with ROE above 10%.
  • OCBC provides dividend yield of 4.7%/5.2% for 2022/2023. Maintain BUY.

OCBC's 2Q22 Results

  • OCBC (SGX:O39) reported net profit of S$1,481m for 2Q22 (up 28% y-o-y and up 9% q-o-q), above our forecast of S$1,137m.
  • Moderate loan growth. Loans expanded 8.4% y-o-y and 1.4% q-o-q in 2Q22 driven by Singapore (+8% y-o-y), Greater China (+8% y-o-y) and network customers expanding in OECD countries (the UK and the US) (+25% y-o-y). By industry sector, building & construction and professionals & individuals grew 17% and 14% y-o-y respectively.
  • Higher CASA ratio enhances sensitivity to rising interest rates. The sizeable NIM expansion of 13bp y-o-y and 16bp q-o-q to 1.71% in 2Q22 was due to:
    1. the hike in US Fed Funds Rate having strong pass-through to domestic interest rates with SORA and three-month SIBOR rising 105bp and 112bp q-o-q respectively to 1.66% and 1.91%, and
    2. OCBC's CASA ratio improving 13ppt to 60.9% over the past three years.
  • Exit NIM was 1.81% for the month of June. Management foresees NIM exceeding 1.8% by end-22. We expect Singapore to have contributed to the bulk of OCBC's NIM expansion.
  • Market-sensitive sources of fees suffered steep drop. Fees and commissions were down 15% y-o-y and 9% q-o-q. Loans and trade-related fees grew 5% y-o-y. Market-sensitive sources wealth management and brokerage & fund management dropped 25% and 15% y-o-y respectively due to lacklustre market sentiment.
  • Contributions from life and general insurance were resilient at S$423m, up 66% y-o-y, due to higher operating profit and mark-to-market gains (decline in insurance contract liabilities due to utilisation of a higher discount rate to value these liabilities). Net trading income was strong at S$267m supported by customer flows.
  • Operating expenses increased 10.1% y-o-y in 2Q22. Staff costs increased by 10.3% y-o-y due to annual salary increments and higher headcount to support growth.
  • Asset quality has improved. NPL balance dropped 8% q-o-q while NPL ratio receded 0.1ppt q-o-q to 1.3% in 2Q22. New NPL formation moderated to S$182m, lower than S$296m in 1Q22. OCBC benefitted from strong recoveries/upgrades for NPLs of S$419m due to oil & gas accounts in Singapore and repayment from customers in Malaysia and Indonesia after their loan relief programmes ended.
  • Muted provisions as asset quality stays benign. Total provisions were only S$72m in 2Q22, which were 69% lower y-o-y. General provisions were S$66m with additional general provisions set aside for updates in its macroeconomic variables (MEV) model, partially offset by write-back from credit upgrades.
  • OCBC has declared an interim dividend of S$0.28 per share for 1H22 (1H21: S$0.25 per share), representing a payout ratio of 44%.

Three-year strategy refresh.

  • OCBC plans to tap on four growth drivers:
    1. rising wealth in Asia through hubs in Singapore and Hong Kong,
    2. ASEAN-China trade and investment flows,
    3. new economy and high-growth industries, and
    4. transition to a sustainable low-carbon world.
  • It will invest to strengthen its comprehensive regional franchise and accelerate digital transformation.

Positive outlook for 2022.

  • OCBC expects growth in net interest income from rising interest rates to more than offset pressure on interest rate of 3.5%. Average loan-to-value ratio is below 50%. 85% of the residential mortgages are for owner occupation.

OCBC - Earnings forecast revision & recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-04
SGX Stock Analyst Report BUY MAINTAIN BUY 16.18 UP 14.750