Review

• OCBC reported stronger 9M23 results, with net profit rising by 32.2% YoY to S$5,399mn. Results are within expectations, representing 79% and 76% of ours and consensus full-year forecasts, respectively. The improved performance was attributed to higher operating income. Annualised ROE stood at 14.0% vs 11.9% a year ago.

• 9M23 net interest income (NII) ballooned by 35.5% YoY to S$7,183mn on higher net interest margin (NIM), which widened by 50 bps YoY (+1 bps QoQ) to 2.28%. Management noted that YoY NIM improvement was attributed to the rising interest rates environment.

• Loans expanded by c. 1% YoY (in constant currency terms). Management noted that sustainable financing loans accelerated by 28% YoY to S$35.8bn, representing 12% of group loans. OCBC’s loan book remains well-diversified, as Corporate, SME, and Consumer/Private Banking comprise 55%, 9%, and 36% of total loans, respectively.

• Total deposits grew at a faster pace than loan growth. The increase of 5% YoY was underpinned by fixed deposits which jumped by 35% YoY to S$162bn vs S$120bn a year ago. CASA deposits slipped further by 13.6% YoY to S$171bn from S$198bn in September 2022 as rising rates drove the shift to fixed deposits. However, the group continues to proactively manage the balance sheet, as FDs and certificates of deposits ran down in 3Q23. CASA deposits accounted for around 46.3% (September 22: 56.1%) of total deposits.

• 9M23 non-interest income (non-NII) increased by 3% YoY, led by an improvement in trading income, as well as net gains from the sale of investment securities and increased profit from insurance. Fee and commission income remained weak, declining 7.5% YoY due to weaker wealth, brokerage and fund management. On a positive note, wealth management fees grew sequentially, led by increased customer activities. The group’s wealth management Assets Under Management (AUM) rose 8% YoY to S$270bn, driven by net new money inflows.

• Total operating expenses rose by 5% YoY to S$3,913mn in 9M23 due to investments in talent and technology. Staff costs expanded by 7.7% YoY. Despite that, OCBC’s cost-to-income ratio improved to 38.2% in 9M23 vs 45.3% a year ago, on the back of positive JAWs.

• Total allowances in 9M23 broadened to S$546mn vs S$270mn in 9M22. QoQ, total allowances eased to S$184mn from S$252mn in 2Q23, as a write-back in allowances for non-impaired assets were migrated to allowances for impaired assets amounting to S$220mn in 3Q. As a result, the total credit costs ballooned to 20 bps in 9M23, vs 9 bps a year ago.

• Meanwhile, the formation of new non-performing assets (NPA) improved QoQ and YoY due to an increase in recoveries and upgrades and lower new NPA formation. The total NPA stood at S$3,095mn (Dec 22: S$3,486mn). The non-performing loans (NPL) ratio strengthened YoY to 1.0% from 1.2% a year ago. Coverage for total NPAs further rose to 139% (September 2022: 108%), supported by higher allowances for nonimpaired assets.

• Capital ratios remained healthy, with common equity tier 1 (CET1) at 14.8%. The all-currency Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) stood comfortably above regulatory guidelines at 159% and 116%.

Impact

• We tweaked our NIM assumptions to align with the better 3Q performance. With that, our FY23/24/25 net profit forecasts are adjusted to S$7,081/7,188/7,352mn from S$6,820/7,045/7,952mn.

Outlook

• OCBC is on track to achieve a resilient FY23 performance, driven by its record 9M earnings thus far. Management attributes the solid underlying performance to increased contributions from its banking, wealth management, and insurance operations. The ongoing interest rate upcycles, and proactive balance sheet management have driven NIM, leading to record NII. Additionally, the wealth management sector showed improvement, with net new money inflows on the rise.

• Overall portfolio quality remains resilient, with the NPL ratio improving to 1%. As such, management maintains a credit cost guidance of around 20 bps for FY23. Elsewhere, OCBC expects loan growth to grow at a softer, low single-digit range this FY, toning it down from earlier guidance for a low to mid-single-digit increase due to the weak market conditions. Nevertheless, NIM should continue to exceed 2.2% to around 2.25%. Additionally, OCBC aims to keep the CTI ratio within the 40% range, reflecting its commitment to efficient cost management. Taken together, ROE is expected to end the FY exceeding 14%, given 9MFY23 ROE of 14.2%.

Valuation

• We raised the market risk premium assumption for the sector to 5.5% from 5.0% due to the rising macro uncertainties impeding growth prospects in the near term. With that, OCBC’s TP is adjusted to S$13.80 from S$14.40. The TP is derived from an implied PBV of c. 1.04x, based on the Gordon Growth Model. BUY reiterated on OCBC.

Source: TA Research - 14 Nov 2023