OCBC - UOB Kay Hian 2023-05-11: Scaling Greater Heights With Record Earnings In 1Q23

• OCBC is committed to maintaining dividend payout ratio at 50%. Management is comfortable with a lower CET-1 CAR of 14.0% and will consider all options for capital management, including special dividends.
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• OCBC provides attractive dividend yield of 6.1%/6.5% for 2023/24. Maintain BUY. Target price: S$17.32.

OCBC's 1Q23 Results

• OCBC Bank (SGX:O39) reported record net profit of S$1,879m for 1Q23 (up 39% y-o-y and 44% q-o-q), significantly above our forecast of S$1,706m and consensus estimate of S$1,585m. ROE also reached a new high of 14.7%.
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• Green shots of recovery for fee income. Fees were down 13% y-o-y due to a high base but rebounded 14% q-o-q. The sequential rebound was driven by wealth management fees, which recovered 37% q-o-q. OCBC benefitted from net new money inflow of S$10b in 1Q23. AUM increased 7% y-o-y to S$270b. Loan-related fees grew 4% y-o-y.
• Stable contributions from insurance business. Contributions from life and general insurance normalised to S$238m in 1Q23 (Great Eastern (SGX:G07)'s 4Q22 performance was affected by valuation losses from insurance contract liabilities). The adoption of SFRS(I) 17 would move mark-to-market for insurance assets and liabilities to fair value through other comprehensive income (FVOCI) (direct to balance sheet). Great Eastern's contribution to OCBC's P&L would be less volatile going forward.
• CIR ratio below 40%. Operating expenses were tightly controlled and increased marginally by 3% y-o-y in 1Q23. Staff costs increased 7% y-o-y. Cost-to-income ratio (CIR) improved 6ppt q-o-q to 37%. Other operating expenses were lower 38% q-o-q primarily due to Great Eastern's adoption of SFRS(I) 17, whereby insurance-related expenses are deducted against insurance revenue. On a like-for-like basis, CIR would have improved about 4ppt q-o-q.
• Asset quality is benign. NPL ratio improved 0.1ppt q-o-q to 1.1% as recoveries and upgrades of S$258m (from industry sectors previously affected by COVID-19, such as manufacturing, hospitality, transportation and construction) exceed new NPL formation of S$174m. NPL balance eased more significantly in Indonesia and Greater China. Credit costs were 12bp in 1Q23, which is below guidance of 15-20bp.

OCBC management's guidance for 2023

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Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2023-05-11 SGinvestors.io

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