Review

• OCBC reported stronger 1QFY24 results, with net profit rising by 5.5% YoY and 22.2% QoQ to S$1,982mn. Results are within expectations, representing 28% of our full-year forecast. The improved performance is attributable to higher operating income. ROE stood at 14.7%, unchanged from a year ago.

• 1QFY24 net interest income (NII) expanded by 4.2% YoY to S$2,437mn on higher asset growth. Loans expanded by c. 2% YoY (in constant currency terms). Management noted that sustainable financing loans accelerated by 34% YoY to around S$42.1bn, representing 14% of group loans. OCBC’s loan book remains well-diversified, as Corporate, SME, and Consumer/Private Banking comprise 56%, 9%, and 35% of total loans, respectively.

• The net interest margin (NIM) slipped by 2 bps QoQ and 3 bps YoY to 2.27%. Management noted that NIM moderated due to the rise in funding costs, outpacing higher asset yields.

• Total deposits grew in tandem with loans. The increase of 1% YoY and 2% QoQ was underpinned by fixed deposits, which widened by 1.3% YoY and 5.3% QoQ to S$158bn. CASA deposits slipped QoQ by 1.1% to S$175bn from S$177bn in December 2023 as rising rates drove the shift to fixed deposits. YoY, CASA rose by 1.2%. CASA deposits accounted for around 47.4% (March 23: 47.1%) of total deposits.

• 1QFY24 non-interest income (non-NII) rebounded healthily by 17% YoY (+47% QoQ), led by improved trading income, higher net fees & commissions and increased profit from insurance. Fee and commission income rose to its highest in the past four quarters, underpinned by increased customer activities driving growth in wealth management fees. The group’s wealth management Assets Under Management (AUM) rose 4% QoQ to S$273bn. Meanwhile, the healthy improvement in trading income was due to increased customer and non-customer flow income.

• Total operating expenses rose by 8% YoY and 3% QoQ to S$1,346mn in 1QFY24 due to investments in talent and technology. Sequentially, staff costs expanded by 7.5% due to higher variable compensation on the back of income growth. Despite the increase, OCBC’s cost-to-income ratio improved QoQ to 37.1% due to positive JAWs.

• Total allowances in 1QFY24 eased to S$169mn vs S$187mn in 4QFY23. YoY, total allowances grew from S$110mn, increasing the total credit costs to 16 bps in 1QFY24, vs 12 bps a year ago. Elsewhere, the formation of new non-performing assets (NPA) improved YoY but rose QoQ as the formation of new corporate NPAs muted higher net recoveries/upgrades and write-offs. The total NPA stood at S$3,040mn (December 23: S$2,901mn). QoQ, the non-performing loans (NPL) ratio was stable at 1% but improved from 1.1% a year ago. Coverage for total NPAs stood at 146% compared to 151% in December 2023 and 121% a year ago.

• Capital ratios remained healthy, with common equity tier 1 (CET1) at 16.2%. The all-currency Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) stood comfortably above regulatory guidelines at 146% and 115%.

Impact

• No change to our earnings estimates.

Outlook

• For now, management believes that the group is on track to achieving its 2024 targets, where NIM is expected to stabilise at around 2.20% and 2.25%, and loan growth is expected to grow at a low single-digit. Credit costs are earmarked to be maintained within the band of 20 to 25 bps. A dividend payout target ratio of 50% is maintained.

• As OCBC advances its wealth management journey, the recent acquisition of PT Bank Commonwealth Indonesia (PTBC) is poised to unlock opportunities for PT Bank OCBC NISP Tbk to serve an additional 1.2 million customers with its wealth management expertise. PTBC's pioneering status as a Mutual Fund Sales Agent aligns with OCBC's strategy to capitalise on ASEAN's potential in wealth management, particularly in Indonesia. The integration, expected to conclude by Q4 2024, underscores OCBC's commitment to expanding its footprint in key markets like Indonesia, alongside Singapore, Malaysia, and Greater China.

• We also foresee OCBC's recent announcement of a S$1.4bn voluntary unconditional general offer for the remaining 11.56% stake in Great Eastern Holdings Limited (GE), with plans to privatise it, is poised to fortify its wealth management leadership. The offer, at S$25.60 per share, represents a significant premium over GE's recent trading price of S$18.70. OCBC anticipates that the deal optimises capital usage and will enhance shareholder returns by further leveraging ongoing synergies between OCBC and GE. To recap, GE has contributed an average of about S$700mn annually in net profit to OCBC over the past 10 years. Currently contributing to around 15% of OCBC's annual net profit, the acquisition will be accretive to earnings.

Valuation

• Rolling valuations forward to FY25, we adjust OCBC’s TP to S$14.70 from S$13.80. The TP is derived from an implied PBV of c. 1.09x, based on the Gordon Growth Model. However, given that the risk-reward potential has narrowed due to the recent rise in the share price, we lower our recommendation from buy to HOLD for OCBC.

Source: TA Research - 13 May 2024