OCBC Bank - Phillip Securities 2022-11-07: Earnings Bolstered By NIM Expansion

OVERSEA-CHINESE BANKING CORP (SGX:O39)

OCBC Bank - Earnings Bolstered By NIM Expansion

OCBC (SGX:O39)'s 3Q22 earnings of S$1.61bn were in line with our estimates. It came from higher net interest margin and net interest income offset by lower fee income. 9M22 PATMI is 73% of our FY22e forecast.
NII grew 44% y-o-y underpinned by loan growth of 6% y-o-y and NIM surging 54bps y-o-y to 2.06%. Total non-interest income dipped 4% y-o-y as lower fee income was partly offset by higher trading and insurance income. Allowances fell 6% y-o-y to S$154mil.

Maintain BUY with an unchanged target price of S$14.22. We raise FY22e earnings by 6% as we increase NII and lower provision estimates for FY22e. We assume 1.23x FY22e P/BV and ROE estimate of 10.4% in our GGM valuation. Catalysts include lower provisions and higher interest income as economic conditions improve.
OCBC is our preferred pick among the three banks due to attractive valuations, upside i n dividend from the 14.4% CET 1 buffer and lower provisioning as the Indonesian and Malaysian economies recover.

NII grew 44% y-o-y led by loan growth of 6% y-o-y and NIM improvement of 54bps y-o-y to 2.06%. Loan growth was driven by Singapore, Indonesia and Greater China. Lending growth was broad based to the building and construction sector, financial institutions, investment and holding companies, and the consumer segment. NIM expansion was mainly due to asset yields outpacing higher funding costs amid a rapidly rising interest rate environment.
OCBC has guided for similarmid-single digit loan growth and NIM of 1.80-1.90% (from 1.70%) for FY22e.

Life insurance profit from Great Eastern Holdings rose 21% y-o-y, mostly due to the net mark-to-market impact of higher interest rates on the valuation of assets and liabilities in its insurance funds. Trading income also increased 134% y-o-y and largely comprised customer flow treasury income.

Total allowances fell 6% y-o-y but were up 112% q-o-q to S$154mil. GPs of S$76mil (2Q22: S$66mil) and SPs of S$78mil (2Q22: S$6mil) were made during the quarter. Total NPAs were down 7% q-o-q and 13% y-o-y to S$3.69bn, and the NPL ratio improved by 10bps q-o-q to 1.2%. Notably, there was an increase in Greater China NPLs by 18% q-o-q mainly due to one Singapore based customer on a property investment.
Nonetheless, OCBC has mentioned that it is a customer with low LTV and the risk is specific to that particular asset. Credit costs improved by 7bps y-o-y to 14bps due to the better credit environment.

Fee income declined 20% y-o-y to S$453mil mainly due to a drop in wealth management fees as customer activities were subdued amid risk-off investment sentiments globally. The decline was partly offset by growth in other fee segments including credit card, and loan and trade-related fees.

Current Account Savings Accounts (CASA) ratio fell 5.9% y-o-y to 56.1% mainly due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 6% y-o-y to S$ 353bn mainly due to the growth in FDs . The Group’s funding composition remained stable with customer deposits comprising ~80% of total funding.

Loan growth: Loans grew 6% y-o-y in 3Q22 to S$303bn, meeting the bank’s guidance of a mid-single digit increase for FY22e. However, management said that it expects continued economic growth but at a slower pace due to the current economic environment. Management also sees further lending opportunities in the wholesale segment and sustainable financing. Mortgage pipelines in Singapore and Hong Kong are also healthy, with more drawdowns expected in FY22.
China: OCBC’s total exposure to mainland China remains at 11% of Group loans (S$34bn), with onshore exposure are at S$7bn and offshore exposure at S$27bn. Nonetheless, customers include mainly top state-owned enterprises, large local corporates, as well as OCBC’s network customers. Onshore China corporate real estate loans made up < 1% (
NIM: Management has raised its NIM guidance to 1.80-1.90% for FY22e (previously 1.70%). It expects 4Q22 NIM to be above 2.10%. OCBC has also said that based on historical data, a 100bps increase in rates would lead to an 18bps increase in NIMs. Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$ 725mil (or 11%) resulting in an increase in our FY22e PATMI by 10%.

We maintain our BUY recommendation on OCBC with an unchanged target price of S$14.22.
We raise FY22e earnings forecast for OCBC by 6% as we increase NII and lower provision estimates for FY22e. We assume 1.23x FY22e P/BV and ROE estimate of 10.4% in our GGM valuation. We raised FY23e earnings by 13% as we increased NII estimates for FY23e. Our ROE estimate for FY23e is raised from 11.2% to 12.5%. The COE is nudged up from higher risk-free rate and lower equity-risk premium.
Catalysts include lower provisions and higher interest income as economic conditions improve.
OCBC is our preferred pick among the three banks due to attractive valuations, upside in dividend from the 14.4% CET 1 buffer and lower provisioning as the Indonesian and Malaysian economies recover.

Glenn Thum Phillip Securities Research | https://www.stocksbnb.com/ 2022-11-07

SGX Stock Analyst Report BUY MAINTAIN BUY 14.220 SAME 14.220