OCBC - CGS-CIMB Research 2022-08-03: Asset Quality Staying Resilient

OCBC - Asset Quality Staying Resilient

  • In OCBC (SGX:O39)'s management’s view, a recession is not on the cards for Singapore at this juncture and regional markets are on a steadier recovery plan. OCBC expects economic growth in Asia to remain positive in 2H22, albeit at a slower pace. In terms of loan growth, OCBC is on track to meeting its mid-single digit target for FY22F (1H22: +2.8% year-to-date).
  • With net interest margin (NIM) expansion coming in at a more aggressive pace than expected in 2Q22, further net-interest income (NII) upside from the more recent Fed rate hikes in Jun/Jul 22 should cushion softer non-interest income in 2H22F. On non-interest income, wealth management income could stay lacklustre in 2H22F as customers remain risk-off amid sustained financial market volatility.
  • OCBC's management guides that sequential q-o-q margin expansion may not be as large as 2Q22 as funding costs rise due to customers switching into higher-yielding fixed deposits (from CASA) and stiffer deposit rate competition amongst peers.
  • With asset quality staying benign in 2Q22, OCBC guides for its credit cost to trend towards the lower end of ~20-25bp in FY22F. While guidance is improved, this imputes higher (double-digit) credit costs in 2H22 to cater for potential macroeconomic headwinds such as persistent inflationary pressures ahead and sustained Russia-Ukraine war.
  • Onshore Mainland China loans came up to ~2% of OCBC's loans in 2Q22 (~S$6bn). Of this portfolio, about one-third was real estate and most of these are to network clients (e.g. Singapore developer expanding into China). Having stress-tested this portfolio, OCBC is not seeing structural asset quality concerns but has nonetheless allocated some additional management overlays to reflect potential downside risks mentioned.
  • Factoring in the Fed rate increasing to ~3.5% by end-2022, a slight cut to ~3.25% by end-2023, and ~3% by end-2024, we raise our FY22F/23F/24F NIM estimates to ~1.79%/2.06%/2% (FY21: 1.54%).
  • Reiterate ADD rating on OCBC with higher GGM-based target price of S$15.50 as we factor in the more aggressive NIM expansion. Attractive entry point at ~1.1x FY22F P/BV.

Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2022-08-03
SGX Stock Analyst Report ADD MAINTAIN ADD 15.50 UP 14.200

Previous report by CGS-CIMB:
2022-06-30 OCBC - Net Interest Margin Expansion Setting In

Target prices by 5 other brokers at OCBC Target Prices.
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