Review

• OCBC reported more robust FY23 results, with net profit rising by 27.1% YoY to S$7,021mn. Results are within expectations, representing 99% of ours and consensus full-year forecasts, respectively. The improved performance was attributed to higher operating income. ROE stood at 13.7% vs 11.1% a year ago.

• A final dividend of 42 cents per share was proposed. With that, total dividends for the year stood at 82 cents (FY22: 68 cents) – representing a payout ratio of 53% (FY22: 53%). The Scrip Dividend Scheme will not apply to the final dividend.

• FY23 net interest income (NII) ballooned by 25.5% YoY to S$9,645mn on higher net interest margin (NIM), which widened by 37 bps YoY (+2 bps QoQ) to 2.28%. Management noted that YoY NIM improvement was attributed to asset growth along with higher NIM across all its key markets.

• Loans expanded by c. 1% YoY (in constant currency terms). Management noted that sustainable financing loans accelerated by 29% YoY to around S$38.6bn, representing 13% of group loans. OCBC’s loan book remains well-diversified, as Corporate, SME, and Consumer/Private Banking comprise 55%, 10%, and 35% of total loans, respectively.

• Total deposits grew at a faster pace than loan growth. The increase of 4% YoY was underpinned by fixed deposits, which jumped by 11.9% YoY to S$150bn vs S$134bn a year ago. CASA deposits slipped YoY by 0.6% YoY to S$171bn from S$181bn in December 2022 as rising rates drove the shift to fixed deposits. However, the group continues proactively managing the balance sheet, as FDs and certificates of deposits ran down in 4Q23. In the meantime, CASA deposits rose by 3.5% QoQ. CASA deposits accounted for around 48.7% (September 23: 56.3%) of total deposits.

• FY23 non-interest income (non-NII) increased by 7.3% YoY, led by an improvement in trading income, as well as net gains from the sale of investment securities and a slight increase in profit from insurance. Fee and commission income remained weak, declining 3% YoY due to weaker wealth, brokerage and fund management. On a positive note, wealth management fees continued stabilising sequentially, led by increased customer activities. The group’s wealth management Assets Under Management (AUM) rose 2% YoY to S$263bn.

• Total operating expenses rose by 8% YoY to S$5,223mn in FY23 due to investments in talent and technology. Staff costs expanded by 8.3% YoY, as S$9mn was set aside to support around 14,000 junior employees with the rising cost of living. Despite that, OCBC’s cost-to-income ratio improved to 38.7% in FY23 vs 42.9% a year ago on the back of positive JAWs.

• Total allowances in FY23 broadened to S$733mn vs S$584mn in FY22. QoQ, total allowances grew marginally to S$187mn from S$184mn in 3Q23. With that, the total credit costs climbed to 20 bps in FY23, vs 16 bps a year ago. Elsewhere, the formation of new non-performing assets (NPA) improved QoQ and YoY due to lower new NPA formation for both the consumer and corporate segments. The total NPA stood at S$2,901mn (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 151% (December 2022: 114%), supported by higher allowances for non-impaired assets, while NPAs continued to trend lower.

• Capital ratios remained healthy, with common equity tier 1 (CET1) at 15.9%. The all-currency Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) stood comfortably above regulatory guidelines at 155% and 116%.

Impact

• Incorporating the FY23 results, we adjusted our FY24/25 net profit estimates to S$7,176/7,502mn from S$7,188/7,352mn. We forecast profit to grow by around 4.5% to S$7,837mn in FY26.

Outlook

• While management expects Asia to exhibit a more robust performance in 2024, there is a cautious anticipation that a global economic slowdown may dampen the growth prospects. Global inflation and ongoing geopolitical risks are also foreseen to persist, necessitating a proactive and agile approach.

• As such, OCBC's strategic targets for 2024 are modest. ROE is expected to fall within the range of 13% to 14% amid a stable NIM target of 2.20% and 2.25% and expectations of low single-digit loan growth. Management believes interest rates will fall, with momentum building in the second half. Credit costs are earmarked to be maintained within the band of 20 to 25 bps, reflecting a prudent risk management approach.

Valuation

• OCBC’s TP is maintained at S$13.80. The TP is derived from an implied PBV of c. 1.08x, based on the Gordon Growth Model. BUY reiterated on OCBC.

Source: TA Research - 29 Feb 2024