OCBC - Positive NIM Surprise
- OCBC (SGX:O39) reported 2Q22 revenues of S$2.9bn (+12% y-o-y/+9% q-o-q) with a net profit of S$1.5bn (+28% y-o-y/+9% q-o-q higher), exceeding expectations.
- Stronger-than-expected net interest income on firm expansion of net interest margin (NIM). Net interest income increased 16% y-o-y/13% q-o-q to a new high of S$1.7bn on asset growth and NIM expansion.
- Mixed non-interest income. Non-interest income of S$1.2bn posted an improvement of 6% y-o-y/3% q-o-q as higher trading income and life insurance profit offset lower fee income and net realized losses from sale of investment securities. Net fees and commissions declined 15% y-o-y/9% q-o-q to S$477m, mainly attributed to lower wealth management, brokerage, and investment banking fees.
- Improvement in credit costs due to better credit conditions; lower new NPA formation. 2Q22 credit costs were mainly general allowances for model updates, partly offset by write-back from credit upgrades. Total allowances: S$72m, 8bps (1Q22: S$44m, 6bps) comprise higher general allowances and lower specific allowances. The new NPA formation of S$182m (1Q22: S$296m) was offset by higher recoveries. The NPL ratio declined to 1.3% (1Q22: 1.4%) and allowance coverage increased to 99% (1Q22: 91%) on a decrease in NPAs.
- OCBC's operating costs increased 10% y-o-y/4% q-o-q on higher staff costs and investments in technology capabilities but resulted in a lower cost-to-income ratio of 43.5% (1Q22: 45.6%) due to positive operating jaws. OCBC's capital ratios remained strong with the CET1 and total CAR at 14.9%/17.5% respectively, the highest among peers.
- Takeaways from analyst briefing by OCBC:
- More colour on NIM. According to management, exit NIM was 1.81% for 2Q22. The 16bps q-o-q upswing in 2Q22’s NIM came as a positive surprise – OCBC’s NIM expansion lagged peers in the previous rate hike cycle in 2018 as the mortgage book required adjusting prime rates accordingly whereas currently, 15% of the loan book is linked to SORA, which results in a faster transmission compared to SIBOR/SOR.
- Pressure on non-interest income likely offset by improvement in net interest income. Market sentiment for wealth improved in June and July, but uncertainty remains, with a y-o-y decline likely for the full year. According to OCBC's management, equity markets are expected to be volatile on recession fears in 2H22, which should see a pick-up in customer flow. However, this is still likely at a slower momentum compared to prior year.
- Exposure to China Real Estate sector. The onshore China loans make up only 2% of OCBC's total loan book (~S$6bn), of which one-third are China onshore real estate loans where half are to network customers/conglomerates, the remaining half to mainly SOEs, and a small portion to private developers. China NPLs have been rising over the last few quarters, but the real estate portion is not substantial, and they are more related to other industries (e.g., 1Q22 had syndicated financing NPL). During 2Q22, OCBC has put through some overlays for the China Real Estate sector. OCBC has a small portfolio of mortgages in Pearl River Delta and Shanghai, mainly on existing properties with LTV of ~20%. Hence they do not see the portfolio affected by the mortgage boycotts mostly in T3 or T4 cities. Management assures that the China loan book is not big and that therefore they are comfortable with the quality of the book after stress testing.
- Credit costs likely at the low end of 20-25bps guidance. Guidance implied ~30bps of credit costs for 2H22, but OCBC's management acknowledged that if the credit environment continues to hold up, this guidance may be conservative. 1H22 saw recoveries that largely came out of relief loans in Malaysia and Indonesia from the consumer book, which is not expected every quarter. Hence, this is likely to normalise in 2H22 and single-digit credit costs will not be repeated.
- Maintain BUY call on OCBC. Our target price of S$15 is based on the Gordon Growth Model (10.5% ROE, 3% growth, 9% cost of equity). This is equivalent to a ~1.23x FY22F P/BV, ~0.5 standard deviation above its 12-year forward P/BV multiple.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Rui Wen LIM DBS Group Research | Tabitha FOO DBS Research | https://www.dbs.com/insightsdirect/ 2022-08-04 2022-08-04
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