OCBC Bank - RHB Invest 2023-01-20: 4Q22 To Be A Stable Quarter; Stay BUY

• OCBC (SGX:O39) is scheduled to release its 4Q22 results on 24 Feb. See Earnings calendar of SGX listed companies.
• We expect the OCBC to report a net profit of S$1.55bn for 4Q22, down an estimated 3.5% q-o-q due mainly to weaker non-II. Key positives would be the continued NIM expansion and benign credit cost on solid asset quality.
• Our target price is based on GGM-derived intrinsic value of S$14.71, with a 2% ESG premium applied. Stay BUY on OCBC with S$15.00 target price, 19% upside and ~5% yield.

NII and NIM to still show improvement.

• OCBC's net-Interest-Income (NII), which increased a sharp 23% q-o-q in 3Q22, is expected rise further in 4Q22. Underpinning the NII improvement would be net-interest-margin (NIM) expansion. Although unlikely to match the 35bps q-o-q expansion to 2.06% in 3Q22, we believe OCBC's NIM would still edge up 9bps q-o-q to 2.15% in 4Q22 even as loans are being repriced to reflect the uptrend in interest rates. In 4Q22, Singapore’s short term rates are up 100-120bps q-o-q.

Within striking distance of loan growth guidance.

• Singapore banking system loans contracted by 4.3% between end-Sep and end-Nov 2022. Management attributes this to businesses deferring investment plans on uncertainty over 2023’s outlook. Despite the slippage, we gathered that OCBC would be able to meet management’s guidance for mid-single digit loan growth in FY22, in constant currency terms.
• Reported loan growth would, however, be a slight miss due to the strengthening of the S$ in 4Q22 (up 5.4% q-o-q). OCBC’s loans grew 4.6% year-to-date-Sep 2022, or an annualised 6.1%.

Non-II remains weak.

• OCBC’s wealth management income remained subdued in 4Q22. While the 4Q is usually a quiet period for the wealth industry, demand for wealth management products was also impacted by the risk-off sentiment among investors and the preference for cash.
• On a positive note, assets under management are still stable even as the bank continues to focus on driving growth in its wealth business. Similarly, contributions from Great Eastern Holdings (SGX:G07) in 4Q22 may be negatively impacted by marked-to-market losses.

Asset quality and credit cost.

• OCBC's management shared that much of the loans under relief assistance have expired, with remaining accounts under indulgence mainly in Indonesia. Repayment trends are good, reaffirming management’s believe that asset quality will be resilient notwithstanding softer GDP growth in 2023. With asset quality trends unchanged from those in 3Q22, we believe OCBC's FY22 credit cost would be at the lower end of management’s 15-20bps guidance.
• While China’s reopening is widely expected to be positive for Singapore, management believes it is still early days to assess the potential impact on the domestic economy and OCBC.