OCBC Bank - UOB Kay Hian 2023-02-27: Ushering In A New Regime Of Certainty For Higher Dividend Payout

• OCBC’s net interest income grew by a hefty 60% y-o-y driven by massive NIM expansion of 79bp y-o-y in 4Q22. Results were dragged lower by unrealised valuation losses from Great Eastern.
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• OCBC provides dividend yield of 5.9% and 6.3% for 2023 and 2024 respectively. Maintain BUY. Target price: S$18.25.

OCBC's 4Q22 Results

• OCBC (SGX:O39) reported net profit of S$1,306m for 4Q22 (up 34% y-o-y but down 19% q-o-q), below our forecast of S$1,503m. See OCBC's announcement dated 24 Feb 2023.
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• Subdued non-interest income. Fees were down 25% y-o-y and 12% q-o-q. Contribution from wealth management dropped 44% y-o-y due to subdued investment activities. Contributions from life and general insurance dropped 78% y-o-y to S$66m as Great Eastern (SGX:G07) incurred unrealised valuation losses caused by using lower discount rates to value its insurance contract liabilities.
• Discipline in cost control. Operating expenses increased 1% y-o-y in 4Q22. Staff costs increased marginally by 1.8% y-o-y. Cost-to-income ratio was healthy at 43.3%.
• NPL ratio was stable at 1.2%. NPL for Greater China increased by 21% or S$157m due to the downgrade of a real estate customer in Hong Kong. The exposure is fully secured with loan-to-value at more than 60%. It is not related to the China property market.
• Beefing up general provisions. Total provisions were S$314m in 4Q22 (3Q22: S$154m). OCBC set aside general provisions of S$213m after updating its macroeconomic variables (MEV) model to reflect a prudent view of economic conditions.
• Accumulating surplus capital. CET-1 CAR improved 0.8ppt q-o-q to 15.2% as risk-weighted assets (RWA) declined due to optimisation and currency translation.
• An upgrade in dividend policy. The board has proposed a final dividend of S$0.40 (+43% y-o-y), bringing FY22 total dividend to S$0.68 and dividend payout ratio at 53% for full-year 2022. See OCBC's dividend dates. Management intends to maintain dividend payout ratio at 50% going forward.

OCBC's guidance for 2023.

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Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2023-02-27 SGinvestors.io

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