OCBC Bank - UOB Kay Hian 2022-11-07: 3Q22 Gaining Consistency; Scaling Greater Heights

SGinvestors.io

OVERSEA-CHINESE BANKING CORP (SGX:O39)

OCBC Bank - 3Q22 Gaining Consistency; Scaling Greater Heights

• OCBC’s net interest income grew 44% y-o-y, driven by a massive 54bp y-o-y NIM expansion in 3Q22. Other non-interest income, including insurance and net trading income, grew 13% y-o-y. This is the third consecutive quarter of excellence in execution and ROE has risen above 12%.
• We raise our 2023 earnings forecast for OCBC by 7.8% due to the rapid NIM expansion and improvement in cost-to-income ratio.
• OCBC provides a dividend yield of 4.7%/5.0% for 2022/2023. Maintain BUY. Target price: S$18.28.

OCBC's 3Q22 Earnings

• OCBC (SGX:O39) reported net profit of S$1,605m for 3Q22 (up 31% y-o-y and up 8% q-o-q), above our forecast of S$1,417m.
• Net interest income crosses the S$2b mark with massive NIM expansion. Loans expanded 6% y-o-y and 2% q-o-q, driven by Singapore (+5% y-o-y), Indonesia (+5% y-o-y), Greater China (+4% y-o-y) and rest of the world (+20% y-o-y) (Australia, the UK and the US). NIM expanded a sizeable 54bp y-o-y and 35bp q-o-q to 2.06%, driven by higher asset yield across key markets, which outpaced the rise in funding cost. Net interest income grew 44% y-o-y to S$2,099m.
• Severe contraction in market-sensitive sources of fee income. Fees declined 20% y-o-y and 5% q-o-q. Contribution from wealth management dropped 40% y-o-y due to a subdued investment climate. AUM was flat y-o-y and q-o-q at S$250b. Similarly, contributions from brokerage & fund management declined 22% y-o-y.
• Other non-interest income grew 13% y-o-y. Contributions from life and general insurance were resilient at S$318m, up 21% y-o-y, due to net mark-to-market gains from assets and liabilities of Greater Eastern's insurance funds. Net trading income was strong at S$194m (+134% y-o-y) due to growth in customer flow treasury income.
• Cost-to-income improved 6.1ppt y-o-y to 40.3%. OCBC's operating expenses increased 7% y-o-y in 3Q22. Staff costs increased by 8% y-o-y due to annual salary increments and higher headcount to support business expansion.
• Asset quality has improved. NPL ratio receded 0.1ppt q-o-q to 1.2% in 3Q22 due to higher recoveries/upgrades of S$669m for corporate and consumer customers in Malaysia and Indonesia that exited relief programmes.
• Loan-loss coverage was healthy at 108%. Total provisions were S$154m in 3Q22 (1H22: S$116m). General provisions were S$76m with additional general provisions set aside for updates in Macroeconomic Variables (MEV) model. Specific provisions included impairment of S$47m for OCBC's overseas properties.
• OCBC achieved ROE of 12.4% for 3Q22. CET-1 CAR eased 0.5ppt q-o-q to 14.4%.

OCBC's 3-year strategy refresh.

• OCBC plans to tap on 4 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.
• Overly conservative guidance for NIM in 2023. OCBC has guided NIM at above 2.1% for 4Q22. Exit NIM for the month of September was already 2.15%. Average NIM is estimated at 1.8-1.9% for full year 2022. For 2023, management has conservatively guided for NIM to expand by 20-30bp to above 2.1%. The moderation in pace of NIM expansion is due to the migration to fixed deposits and catch-up in re-pricing cost of deposits higher.
• Migration to fixed deposits. OCBC's CASA ratio deteriorated by 4.8ppt q-o-q to 56.1% in 3Q22. Management expects CASA ratio to hold above 50% due to strengthening of digital capabilities for cash management and operating accounts secured over the years.

OCBC is open to acquisitions but no deal on the table right now.

• OCBC will look at opportunities for acquisitions in key markets, such as Singapore, Malaysia, Indonesia and Greater China. Management is positive on long-term growth in Indonesia. It is keen to seize opportunities to acquire and expand inorganically in Indonesia but clarified that there is no deal on the table at this juncture.

OCBC – Earnings forecast revision and recommendation

• We raise our 2023 earnings forecast for OCBC by 7.8% due to the rapid NIM expansion and improvement in cost-to-income ratio.
• Maintain BUY rating on OCBC. Our target price of S$18.28 for OCBC is based on 1.44x 2023F P/B, derived from the el (ROE: 12.0%, COE: 8.5%, growth: 0.5%).
• See
  • OCBC's Share Price,
  • OCBC's Target Price,
  • OCBC's Analyst Reports,
  • OCBC's Dividend History,
  • OCBC's Announcements,
  • OCBC's Latest News.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-07

SGX Stock Analyst Report BUY MAINTAIN BUY 18.28 UP 16.820