Review

• OCBC reported stronger 1HFY24 results, with net profit rising by 9.4% YoY to S$3,926mn. Results are within expectations, representing 54.7% of our full-year forecast. The improved performance is attributable to higher operating income. ROE stood at 14.5%.

• A higher interim dividend of 44 cents (1H 2023: 40 cents) per share has been declared, translating to a dividend payout ratio of 50%.

• 1HFY24 net interest income (NII) expanded by 3.0% YoY to S$4,867mn on higher asset growth. Loans expanded by c. 2% YoY (+3% in constant currency terms), underpinned by corporate loans and mortgage increases. By geography, loans were led by the Rest of the World (+8% YoY), followed by Malaysia (+4% YoY) and Singapore (+2% YoY). OCBC's loan book remains well-diversified by segment, as Corporate, SME, and Consumer/Private Banking comprise 56%, 9%, and 35% of total loans, respectively.

• The net interest margin (NIM) slipped by 5 bps YoY to 2.23% in 1HFY24 due to an increase in higher-quality but lower-yielding loans. QoQ NIM also fell by 7 bps due to lower yielding higher quality loans and tighter loan yields due to market rate movements.

• Total deposits slipped 1% YoY (unchanged QoQ) as CASA growth of 4.7% YoY to S$177bn was muted by a 4.3% YoY decline in higher-cost fixed deposits to S$157bn. In 1HFY24, CASA deposits accounted for around 47.9% (June 2023: 45.3%) of total deposits.

• 1HFY24 non-interest income (non-NII) rebounded healthily by 15% YoY, led by improved trading income (+28.3% YoY), higher net fees & commissions (+7.0% YoY) and increased profit from life & general insurance (+16.6% YoY). Fee and commission income rose to S$945mn, underpinned by increased customer activities driving growth in wealth management fees. The group's wealth management Assets Under Management (AUM) grew by 2% YoY to S$279bn. Meanwhile, the healthy improvement in trading income was due to increased customer and noncustomer flow income (+37% YoY).

• Total operating expenses rose 6% YoY (+2% QoQ) to S$2,719mn in 1HFY24 due to higher staff, IT-related and business promotion expenses. Despite the increase, OCBC’s cost-to-income ratio improved marginally to 37.5% from 37.8% in 1HFY23.

• Total allowances in 1HFY24 eased to S$313mn vs S$362mn a year ago. QoQ, total allowances improved from S$169mn to S$144mn. The total credit costs improved to 15 bps in 1HFY24 (1HFY23: 21 bps). Elsewhere, the formation of new non-performing assets (NPA) improved YoY and QoQ. The total NPA stood at S$2,901mn (June 2023: S$3,275mn). With that, the non-performing loans (NPL) ratio strengthened slightly to 0.9% from 1.1% a year ago. Coverage for total NPAs stood at 155% compared to 146% in March 2024 and 131% a year ago.

• Capital ratios remained healthy, with common equity tier 1 (CET1) at 15.5%. The all-currency Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) stood comfortably above regulatory guidelines at 142% and 114%.

Impact

• No change to our earnings estimates.

Outlook

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

• OCBC's growth prospects are expected to be anchored by the management's strategic priorities, including 1) capturing rising Asian wealth, evidenced by an 8% increase in Wealth Management AUM since December 2022 and a rise in digitally acquired New-to-Bank retail customers, 2) support ASEAN-Greater China trade and investment flows, with franchise revenue in Greater China doubling since the 1H of 2022 and a surge in cross-border QR transactions. 3) OCBC aims to unlock value from the new economy and high-growth industries, such as the increased demand for data centres. 4) Furthermore, OCBC is committed to driving the transition to a sustainable, low-carbon world. OCBC was ranked the top loan arranger for ESG loans in Southeast Asia in the first quarter of 2024 by the London Stock Exchange Group and has committed S$63bn in sustainable finance, surpassing the 2025 target of S$50bn.

Valuation

• We tweaked OCBC’s TP to S$15.20 from S$14.70. The TP is derived from an implied PBV of c. 1.09x, based on the Gordon Growth Model, and a 3% ESG premium. We reiterate our HOLD recommendation on OCBC.

Source: TA Research - 5 Aug 2024