OCBC Bank - Riding The Rate Hike Wave
- The US Federal Reserve has taken unprecedented action, raising interest rates by 75bp to 3.25% in Sep in its bid to reel in persistent inflation.
- In Singapore, investors have correspondingly been concerned that a recession in the US would spill over into Asian economies, resulting in an overhang on banks’ valuations. Although higher interest rates may translate to slower global economic growth amid higher unemployment rates, we think Singapore banks will nonetheless remain beneficiaries of stronger NIM expansion ahead.
- Market participants have correspondingly reacted to the Fed’s refreshed commitment towards staving off inflation with the Fed fund futures now implying a ~4.3% rate by end-2022F before rising to ~4.6% by mid-2023F, and then easing to ~3.6% by end-2024F.
- We raise our NIM expectations for OCBC (SGX:O39) as we factor in higher Fed rates as outlined above, which are notably higher than the ~3.6% peak we previously assumed. In tandem, we have also toned down our loan growth estimates for FY23-24F from ~5-6% to ~4-5%, in line with softer global growth sentiment ahead. Consequently, we raisie our EPS forecast for OCBC by ~1%/3%/3% for FY22F/23F/24 respectively.
- Reiterate ADD recommendation on OCBC with an unchanged GGM-base target price.
- Key risk to our call is a steeper-than-expected rise in funding costs from CASA outflow into higher-yielding fixed deposits amid stiffer deposit-taking competition. We have factored in ~15-20bp credit costs in FY22-24F (unchanged), though we remain cognisant of potential asset quality deterioration, particularly from the SME segment if trade sentiment weakens.
- While there is conflicting newsflow on the extent mortgage customers in China are refusing to service their payments, we highlight that OCBC’s onshore mainland China exposure stood at ~2% of group loans at end-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).
- Although OCBC’s higher-than-peers CET1 ratio of 14.9% is a sizeable buffer against significant asset quality deterioration, if any, its high capital level is simultaneously an overhang on the stock given management’s guarded guidance on M&A and dividends.
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 2022-09-30 2022-09-30
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