• 1Q23 earnings of S$1.88bn were slightly above our estimates. It came from higher net interest income and a reversal of fee income decline offset by lower insurance income. 1Q23 PATMI was 28% of our FY23e forecast.
• NII grew 56% YoY as NIM surged 75bps YoY to 2.30% and loan growth remained flat YoY. Total non-interest income dipped 11% YoY from lower fees and insurance, but fee income momentum was building up with a 65% QoQ rise. Allowance remained subdued with credit costs at 12bps.
• Maintain BUY with an unchanged target price of S$14.96. We maintain FY23e earnings as we increase NII estimates for FY23e due to higher NIMs, offset by lower other non-interest income and higher allowance estimates. We assume 1.29x FY22e P/BV and ROE estimate of 10.8% in our GGM valuation. Catalysts include continued interest income growth and fee income recovery as economic conditions improve. OCBC is our preferred pick among the three banks due to attractive valuations and dividend yield of 6.5%, buffered by a well-capitalised 15.9% CET 1, and fee income recovery from China’s re-opening.

The Positives

- Fee income YoY decline moderated, up 14% QoQ. Fee income YoY decline of 14% moderated from the previous quarter (4Q22: -24%) and dipped to S$453mn mainly due to a drop in wealth management fees as customer activities were subdued amid risk-off investment sentiments globally. Nonetheless, it saw its first QoQ increase in 6 quarters, growing 14% QoQ mainly driven by higher wealth management fees. The Group’s wealth management income was S$1.10 billion, 33% higher QoQ, and contributed 33% to the Group’s total income. OCBC’s wealth management AUM was higher at S$270bn (1Q22: S$251bn) mainly driven by sustained growth in net new money inflows and positive market valuation.

+ Net interest income surged 56% YoY. NII grew 56% YoY led by NIM improvement of 75bps YoY to 2.30% despite loan growth remaining flat YoY. NIM expansion was mainly due to loan yields rising faster than the increase in funding costs on the back of the rapid rise in interest rates during the year.  However, both NII and NIM declined QoQ, the first decline in 6 quarters. This was mainly due to a rise in asset yields being offset by higher funding costs, as well as lower loans-to-deposits ratio as the increase in deposits outpaced that of loans. Nonetheless, OCBC has increased their NIM guidance for FY23e from 2.10% to 2.20%.

+ Trading income up 12% YoY. Trading income grew 12% YoY and 69% QoQ. YoY growth was largely driven by higher non-customer flow income as customer flow income remained flat. QoQ growth was driven by both higher customer and non-customer flow income, as well as higher net realised gains from the sale of investment securities of S$24mn (4Q22: loss of S$67mn).

The Negatives

- Allowances up 151% YoY, credit costs at 12bps. Total allowances fell 65% QoQ but were up 151% YoY to S$110mn. GPs of S$54mn (4Q22: S$213mn) and SPs of S$56mn (4Q22: S$101mn) were made during the quarter. The YoY increase was mainly due to higher allowances set aside for non-impaired assets. Total NPAs were down 5% QoQ and 23% YoY to S$3.33bn, and the NPL ratio improved by 30bps YoY to 1.1%. Credit costs increased by 6bps YoY but improved by 23bps QoQ to 12bps.

- CASA ratio continues to dip. Current Account Savings Accounts (CASA) ratio fell 15.6% points YoY to 47.1% due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 5% YoY to S$367bn underpinned by strong growth in FDs. The Group’s funding composition remained stable with customer deposits comprising more than 80% of total funding.

• 4Q22 earnings of S$1.31bn were below our estimates. It came from lower fee and insurance income offset by higher net interest income. FY22 PATMI was 89% of our FY22e forecast. 4Q22 DPS was up 43% YoY to 40 cents; full-year FY22 dividend rose 28% YoY to 68 cents.
• NII grew 60% YoY underpinned by loan growth of 2% YoY and NIM surging 79bps YoY to 2.31%. Total non-interest income dipped 42% YoY due to lower fee and insurance income. Allowances stable YoY at S$314mn.
• Maintain BUY with a higher target price of S$14.96 (prev. S$14.22). We lower FY23e earnings by 8% as we lower NII but increase fee income estimates for FY23e. We assume 1.29x FY22e P/BV and ROE estimate of 10.8% in our GGM valuation. Catalysts include continued interest income growth and fee income recovery as economic conditions improve. OCBC is our preferred pick among the three banks due to attractive valuations and yield of 5.4%, huge dividend buffer from the 15.2% CET 1, and fee income recovery from China’s reopening.

The Positives

+ Net interest income surged 60% YoY. NII grew 60% YoY led by loan growth of 2% YoY and NIM improvement of 79bps YoY to 2.31%. Loan growth was largely driven by lending in Singapore, Australia, the United States and United Kingdom. NIM expansion was mainly due to loan yields rising faster than the increase in funding costs on the back of the rapid rise in interest rates during the year. OCBC has guided for a NIM in the region of 2.10% for FY23e.

+ Credit cost improved by 6bps YoY. Total allowances fell 1% YoY but were up 105% QoQ to S$314mn. GPs of S$213mn (3Q22: S$76mn) and SPs of S$101mn (3Q22: S$78mn) were

made during the quarter. Total NPAs were down 5% QoQ and 20% YoY to S$3.49bn, and the NPL ratio improved by 30bps YoY to 1.2%. Notably, there was an increase in Greater China NPLs by 21% QoQ mainly due to the downgrade of a corporate relationship in Hong Kong. Nonetheless, OCBC said that it is a fully secured customer with LTV of >60% and the risk is non-systemic and is not related to mainland China real estate. Credit costs improved by 6bps YoY to 35bps due to the better credit environment.

The Negatives

- Fee income fell 25% YoY. Fee income declined 25% YoY to S$399mn mainly due to a drop in wealth management fees as customer activities were subdued amid risk-off investment sentiments globally. Nonetheless, OCBC’s wealth management AUM was higher at S$258bn (4Q21: S$257bn) mainly driven by continued growth in net new money inflows which offset negative market valuation.

- Insurance and trading income fall. Life insurance profit from Great Eastern Holdings fell 78% YoY from lower net valuation gains in its insurance funds experiencing unrealised mark-to-market loss on its insurance contract liabilities. Trading income also fell 2% YoY and largely customer flow treasury income.

- CASA ratio dipped YoY. Current Account Savings Accounts (CASA) ratio fell 11.5% YoY to 51.8% due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 2% YoY to S$350bn mainly due to the growth in FDs. The Group’s funding composition remained stable with customer deposits comprising ~83% of total funding.

• 3Q22 earnings of S$1.61bn were in line with our estimates. It came from higher net interest margin and net interest income offset by lower fee income. 9M22 PATMI is 73% of our FY22e forecast.
• NII grew 44% YoY underpinned by loan growth of 6% YoY and NIM surging 54bps YoY to 2.06%. Total non-interest income dipped 4% YoY as lower fee income was partly offset by higher trading and insurance income. Allowances fell 6% YoY to S$154mn.
• Maintain BUY with an unchanged target price of S$14.22. We raise FY22e earnings by 6% as we increase NII and lower provision estimates for FY22e. We assume 1.23x FY22e P/BV and ROE estimate of 10.4% in our GGM valuation. Catalysts include lower provisions and higher interest income as economic conditions improve. OCBC is our preferred pick among the three banks due to attractive valuations, upside in dividend from the 14.4% CET 1 buffer and lower provisioning as the Indonesian and Malaysian economies recover.

Results at a glance

Source: Company, PSR

The Positives

+ Net interest income grew 44% YoY. NII grew 44% YoY led by loan growth of 6% YoY and NIM improvement of 54bps YoY to 2.06%. Loan growth was driven by Singapore, Indonesia and Greater China. Lending growth was broad based to the building and construction sector, financial institutions, investment and holding companies, and the consumer segment. NIM expansion was mainly due to asset yields outpacing higher funding costs amid a rapidly rising interest rate environment. OCBC has guided for similar mid-single digit loan growth and NIM of 1.80-1.90% (from 1.70%) for FY22e.

+ Insurance and trading income increase. Life insurance profit from Great Eastern Holdings rose 21% YoY, mostly due to the net mark-to-market impact of higher interest rates on the valuation of assets and liabilities in its insurance funds. Trading income also increased 134% YoY and largely comprised customer flow treasury income.

+ Allowances fell 6% YoY to S$154mn. Total allowances fell 6% YoY but were up 112% QoQ to S$154mn. GPs of S$76mn (2Q22: S$66mn) and SPs of S$78mn (2Q22: S$6mn) were made during the quarter. Total NPAs were down 7% QoQ and 13% YoY to S$3.69bn, and the NPL ratio improved by 10bps QoQ to 1.2%. Notably, there was an increase in Greater China NPLs by 18% QoQ mainly due to one Singapore based customer on a property investment. Nonetheless, OCBC has mentioned that it is a customer with low LTV and the risk is specific to that particular asset. Credit costs improved by 7bps YoY to 14bps due to the better credit environment.

The Negatives

- Fee income fell 20% YoY. Fee income declined 20% YoY to S$453mn mainly due to a drop in wealth management fees as customer activities were subdued amid risk-off investment sentiments globally. The decline was partly offset by growth in other fee segments including credit card, and loan and trade-related fees.

- CASA ratio dipped YoY. Current Account Savings Accounts (CASA) ratio fell 5.9% YoY to 56.1% mainly due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 6% YoY to S$353bn mainly due to the growth in FDs. The Group’s funding composition remained stable with customer deposits comprising ~80% of total funding.

Outlook

Loan growth: Loans grew 6% YoY in 3Q22 to S$303bn, meeting the bank’s guidance of a mid-single digit increase for FY22e. However, management said that it expects continued economic growth but at a slower pace due to the current economic environment. Management also sees further lending opportunities in the wholesale segment and sustainable financing. Mortgage pipelines in Singapore and Hong Kong are also healthy, with more drawdowns expected in FY22.

China: OCBC’s total exposure to mainland China remains at 11% of Group loans (S$34bn), with onshore exposure are at S$7bn and offshore exposure at S$27bn. Nonetheless, customers include mainly top state-owned enterprises, large local corporates, as well as OCBC’s network customers. Onshore China corporate real estate loans made up <1% (<S$3bn) of total loans, mainly lending to network customers. Greater China NPLs rose by 18% QoQ to S$744mn and is mainly due to one network customer name, which is highly secured with LTV at <60%.

NIM: Management has raised its NIM guidance to 1.80-1.90% for FY22e (previously 1.70%).  It expects 4Q22 NIM to be above 2.10%. OCBC has also said that based on historical data, a 100bps increase in rates would lead to an 18bps increase in NIMs. Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$725mn (or 11%) resulting in an increase in our FY22e PATMI by 10%.

• 2Q22 earnings of S$1.48bn were in line with our estimates, from higher net interest income and non-interest income, and lower allowances. 1H22 PATMI is 47% of our FY22e forecast. 2Q22 DPS rose 12% YoY to 28 cents.
• NII grew 16% YoY underpinned by loan growth of 8% YoY and NIM increasing 13bps YoY to 1.71%. Total non-interest income grew 6% YoY due to higher trading and insurance income offset by lower fee income. Allowances fell 69% YoY to S$72mn.
• Maintain BUY with an unchanged target price of S$14.22. Our FY22e estimates remain unchanged. Catalysts include lower provisions and higher interest income as economic conditions improve. OCBC is our preferred pick amongst the three banks due to attractive valuations, upside in dividend from a 15% CET 1 and lower provisioning as the Indonesian and Malaysian economies recover.

The Positives

+ Net interest income grew 16% YoY. NII grew 16% YoY led by loan growth of 8% YoY and NIM improvement of 13bps YoY to 1.71%. Loan growth was driven by Singapore, Indonesia, Greater China, USA and UK, and the building and construction and general commerce sectors, as well as consumer lending, including mortgages. NIM expansion was mainly due to asset yields outpacing higher funding costs amid a rapidly rising interest rate environment. OCBC has guided for mid-single digit loan growth (from mid to high-single digit) and NIM of 1.70% (from 1.5-1.55%) for FY22e.

+ Allowances fell 69% YoY to S$72mn. Total allowances fell 69% YoY but were up 64% QoQ to S$72mn. GPs of S$66mn (1Q22: S$13mn) and SPs of S$6mn (1Q22: S$31mn) were made during the quarter. Total NPAs were down 8% QoQ and 3% YoY to S$4bn, and the NPL ratio improved by 10bps QoQ to 1.3%. Credit costs improved by 22bps to 8bps due to the better credit environment and write-backs in Malaysia. 

The Negatives

- Fee income fell 15% YoY. Fee income declined 15% YoY to S$477mn mainly due to lower wealth management, brokerage and investment banking fees, in line with weaker investor sentiment globally. Nonetheless, loan and trade-related fees increased on the back of higher lending and trade volumes, and credit card fees were also higher during the quarter, in line with the broader reopening of economies and resumption of activities. Trading income increased 26% YoY to S$267mn mainly from higher customer and non-customer flow of treasury income, while insurance income soared 82% YoY to S$372mn due to an increase in operating profit and mark-to-market gains in its insurance funds from rising interest rates. On the whole, non-interest income saw an increase of 6% YoY and 3% QoQ to S$1.18bn.

Outlook

Loan growth: Loans grew 8% YoY in 2Q22 to S$298bn, exceeding the bank’s guidance of a mid-single digit increase for FY22e. However, management said that it expects continued economic growth but at a slower pace due to the current economic environment. Management also sees further lending opportunities in the wholesale segment and sustainable financing. Mortgage pipelines in Singapore and Hong Kong are also healthy, with more drawdowns expected in FY22.

China: OCBC’s total exposure to mainland China remains at 11% of Group loans (S$34bn), with onshore exposure are at S$7bn and offshore exposure at S$27bn. Nonetheless, customers include mainly top state-owned enterprises, large local corporates, as well as OCBC’s network customers. Less than one-third of the Group’s Mainland China onshore exposure (S$2bn) is corporate real estate loans and is largely lending to the bank’s network customers. Greater China NPLs remained relatively unchanged and rose by 4% QoQ to S$631mn.

NIM: Management has raised its NIM guidance to 1.70% for FY22e (previously 1.5 – 1.55%).  It expects to end 2022 with an exit NIM of 1.80%. OCBC has also said that based on historical data, a 100bps increase in rates would lead to an 18bps increase in NIMs. Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$725mn (or 11%) resulting in an increase in our FY22e PATMI by 10%.

• 1Q22 earnings of S$1.36bn were in line with our estimates despite lower-than-expected non-interest income which were offset by higher net interest income and lower allowances. 1Q22 PATMI is 22% of our FY22e forecast.
• NII grew 4% YoY due to loan growth of 8% YoY despite NIM falling 1bp YoY to 1.55%. Total non-interest income fell 23% YoY due to unfavourable market conditions. Nonetheless, allowances fell 73% YoY to S$44mn.
• Maintain BUY with an unchanged target price of S$14.22. Our FY22e estimates remain unchanged. Catalysts include lower provisions and higher interest income as economic conditions improve. A 100bps rise in interest rates can raise NIM by 0.18% and PATMI by 10%. OCBC is our preferred pick amongst the three banks due to attractive valuations, upside in dividend from the 15% CET 1 and lower provisioning as the Indonesian and Malaysian economies recover.

Results at a glance

Source: Company, PSR

The Positives

+ Net interest income grew 4% YoY. NII grew 4% YoY and 1% QoQ led by loan growth of 8% YoY and 1% QoQ while NIMs declined 1bp YoY but grew 3bps QoQ to 1.55%. Loan growth was driven by Singapore, UK, Australia and USA. OCBC has guided  mid- to high single-digit loan growth for FY22e.

+ Allowances fell 73% YoY to S$44mn. Total allowances fell 73% YoY and 86% QoQ to S$44mn. GPs of S$13mn (4Q21: write-back of S$70mn) and SPs of S$31mn (4Q21: S$387mn) were made during the quarter. Total NPAs were down 1% QoQ but up 7% YoY to S$4.3bn, but the group NPL ratio improved by 10bps QoQ to 1.4%. NPLs in Malaysia were up 2% QoQ to S$1.5bn and NPLs in Indonesia were up 3% QoQ to S$1.24bn in 1Q22. Credit costs improved by 31bps to 6bps due to the improving credit environment.

The Negatives

- Total non-interest income fell 23% YoY. The YoY decline was mainly due to lower WM fees, trading income and life insurance profit coming off the previous year’s high which was underpinned by robust customer and investment activities due to favourable market conditions. However, total non-interest income grew 8% QoQ to S$1.14bn mainly from growth in trading and insurance income. Fee and commission income fell 11% YoY and 1% QoQ due a fall in credit card, loan and trade-related fees which offset a rise in WM and brokerage fees. Trading income fell 29% YoY but grew 48% QoQ due to an increase in customer and non-customer flow treasury income. Insurance income fell 34% YoY but grew 12% QoQ due to a rise in operating profit and mark-to-market gains from a decline in insurance contract liabilities due to a higher discount rate to value these liabilities, in line with rising interest rates.

Outlook

Loan growth: Loans grew 8% YoY in 1Q22 to S$294bn, meeting the bank’s guidance of a mid to high single-digit increase for FY22e. Management sees further lending opportunities in the wholesale segment and sustainable financing. Mortgage pipelines in Singapore and Hong Kong are also healthy, with more drawdowns expected in FY22.

China: OCBC’s total exposure to mainland China remains at 11% of Group loans, with onshore exposure at S$7bn and offshore exposure at S$27bn. Nonetheless, customers include mainly top state-owned enterprises, large local corporates, as well as OCBC’s network customers. Less than one-third of the Group’s Mainland China onshore exposure (S$2bn) are corporate real estate loans, largely lending to the bank’s network customers. Greater China NPLs remained relatively unchanged and rose by 3% QoQ to S$1,244mn.

NIM: Management has guided stable NIMs of 1.5-1.55% for FY22e. Nonetheless, it said that based on historical data, a 100bps increase in rates would lead to a 18bps increase in NIMs. Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$725mn (or 11%) resulting in an increase in our FY22e PATMI by 10%.

Investment Action

Maintain BUY with an unchanged target price of S$14.22

We maintain our BUY recommendation with an unchanged GGM target price of S$14.22. We are keeping our FY22e forecast unchanged. We continue to assume 1.24x FY22e P/BV and ROE estimates of 9.3% in our GGM valuation. Catalyst includes lower provisions and higher interest income as economic conditions improve. A 100bps rise in interest rates can raise NIM by 0.18% and PATMI by 10%. OCBC is our preferred pick amongst the three banks due to attractive valuations, upside in dividend from the 15% CET 1 buffer and lower provisioning as the Indonesian and Malaysian economies recover.

• FY21 earnings of S$4.86bn met our estimates despite higher-than-expected allowances which were offset by higher net interest income. 4Q21 DPS rose 12% to 28 cents.
• Management guidance is single-digit loans growth, stable NIMs and lower credit costs for FY22e.
• Maintain BUY with an unchanged target price of S$14.22. We raise FY22e earnings by 13% as we increase NII and fee income estimates for FY22e. We assume 1.28x FY22e P/BV and ROE estimate of 9.3% in our GGM valuation. Catalysts include lower provisions and higher interest income as economic conditions improve. A 100bps rise in interest rates can raise NIM by 0.18% and PATMI by 10%. OCBC is our preferred pick amongst the three banks due to attractive valuations, upside in dividend from the 15% CET 1 buffer and lower provisioning as Indonesia and Malaysian economies recover.

The Positives

+ Fee income grew 2% YoY. Fee and commission income grew 2% YoY but fell 7% QoQ due to year-end seasonality. Full-year fee income grew 12% YoY to a record S$2.25bn from broad-based fee growth on the back of higher transaction volumes and customer activities, particularly from wealth management income which made up 37% (S$3.92bn) of the Group’s income in FY21. The Group’s FY21 assets under management (AUM) rose 7% YoY to record high S$258bn. FY21 insurance income grew 63% to S$1.14bn, driven by favourable financial market conditions and higher operating profit from Great Eastern Holdings’ insurance business.

+ Net interest income grew 4% YoY. NII grew 4% YoY and 2% QoQ led by loan growth of 8% YoY and 2% QoQ while NIMs remained flat QoQ at 1.52%. Loan growth was broad-based across both corporate and consumer segments, with the majority of the increase coming from Singapore, Greater China, and the Group’s international network. OCBC has guided  mid- to high single-digit loan growth for FY22e.

The Negatives

- SPs increased 109% QoQ. SPs of S$387mn were made during the quarter, which is 109% higher than 3Q21’s SPs of S$185mn. This increase was mainly driven by project financing delays due to supply chain disruption brought about by COVID-19. Management said that they are located mainly in Greater China and do not pose a systemic risk. However, OCBC was able to write back GPs of S$70mn during the quarter mainly due to downgrade of accounts to ECL stage 3 allowances, and refresh of the macroeconomic variables in the ECL model. Total NPAs rose by 2% QoQ and 8% YoY to S$4.3bn, but the group NPL ratio was stable at 1.5%. OCBC has guided credit costs of 20-25bps for FY22e compared with FY21’s credit costs of 29bps.

- Malaysia and Indonesia NPLs up QoQ. NPLs in Malaysia were up 8% QoQ to S$1.47bn while NPLs in Indonesia were up 17.5% QoQ to S$1.21bn in 4Q21. The increase was mainly due to loan moratorium extensions in both countries and the introduction of the PEMULIH relief package in Malaysia, where some loans under support were classified as NPLs. Nonetheless, management said that the increased NPLs in the two countries are customer- related and cover a broad spectrum of loans and are not trend-related.

Outlook

Loan growth: Loans grew 8% YoY in 4Q21 to S$290bn, meeting the bank’s guidance of a high single-digit increase for FY21e. Management sees further lending opportunities in the wholesale segment and sustainable financing. Green and sustainable finance was up 66% YoY to S$23.3bn and now forms 8% of its loan book. Mortgage pipelines in Singapore and Hong Kong are also healthy, with more drawdowns expected in FY22.

China: OCBC’s total exposure to mainland China remains at 11% of Group loans, with onshore exposure at S$7bn and offshore exposure at S$25bn. Nonetheless, customers include mainly top state-owned enterprises, large local corporates, as well as OCBC’s network customers. Less than one-third of the Group’s Mainland China onshore exposure (S$2bn) are corporate real estate loans, largely lending to the bank’s network customers. NPL ratio for non-bank Mainland China loans increased to 0.8% from 0.5% in the previous quarter due to project financing delays mentioned above.

NIM: Management has guided stable NIMs of 1.5-1.55% for FY22e. Nonetheless, it said that based on historical data, a 100bps increase in rates would lead to a 18bps increase in NIMs. Assuming rate hikes totalling 100bps this year, based on our calculations, our FY22e NII can climb S$725mn (or 11%) resulting in an increase in our FY22e PATMI by 10%.

• 3Q21 earnings PATMI of S$1.22bn in line with our estimate. 9M21 PATMI is 80% of our FY21e forecast on lower-than-expected allowances.
• NIM fell 6bps QoQ, though NII remained flat in the same period and grew 3% YoY.
• Provisions were 53% YoY lower to S$163mn due to lower SPs and GP write-back. Asset quality suffered due to an increase in loans under relief in Malaysia.
• Maintain BUY with an unchanged target price of S$14.22. We raise FY21e earnings by 1.8% as we increase profits of associates. Our TP remains unchanged at 1.24x P/BV and 9.3% FY21e ROE. Catalyst includes lower provisions and higher interest income as economic conditions improve.

The Positives

+ Fee income grew 14% YoY. Fee and commission income grew 14% YoY and 1% QoQ, particularly from wealth management income which made up 35% (S$897mn) of the Group’s income in 3Q21. The Group’s assets under management (AUM) fell to S$123bn, matching 1Q21, mainly due to the decline in market valuations which offset net new money inflows.

+ GP write-backs of S$22mn. OCBC was able to write back GPs of S$22mn during the quarter as the credit environment improved while SPs of S$185mn were made. Total NPAs rose by 4% QoQ to S$4.2bn, mostly attributed to downgrades of secured consumer loans in Malaysia. Nonetheless, OCBC has set aside S$185mn of SPs this quarter mainly for corporate and consumer accounts in Malaysia and Indonesia. Group NPLs were stable at 1.5% in 2Q21.

The Negatives

- NIM fell 6bps QoQ to 1.52%. NIM declined by 6bps QoQ mainly due to the classification of loans to NPL (mostly from downgrades of secured consumer loans in Malaysia) and more competitive corporate loans which resulted in lower asset yields.  As such, management expects NIM to maintain at 1.5%-1.52% until 1H22. Nonetheless, NII grew 3% YoY and remained flat QoQ, underpinned by loans growth of 4% QoQ and 6% YoY, backed by demand from Greater China, Singapore and the United Kingdom. Loan growth this quarter was led by higher loans to the building and construction sector.

- Loans under moratorium unchanged at 2%. Loans under moratorium remained at 2% of the total, unchanged from the last quarter. The portfolio of relief loans, however, increased to S$6.3bn in 3Q21 from S$4.5bn. The increase was due to an increase in Malaysia’s relief loans to S$4bn in 3Q21 from $1.5bn, representing 19% of Malaysia’s total loans. Nonetheless, management has mentioned that the majority of loans under moratorium are performing loans, with all loans under moratorium in Singapore performing and about 20% of Malaysia’s loans under moratorium non-performing. Management expects the non-performing loans under moratorium to drop with the improving economic situation. 89% of all loans under moratorium remain secured.

Outlook

Loan growth: Loans grew 6% YoY in 3Q21, trailing the bank’s guidance of a high single-digit increase for FY21e. Management, however, believes its target is achievable. It sees lending opportunities in the wholesale segment and sustainable financing. Green and sustainable finance was up 12% QoQ to S$19.5bn and now forms 7% of its loan book. Mortgage pipelines in Singapore and Hong Kong are also healthy, with drawdowns expected in 2H21.

China: OCBC’s total exposure to mainland China remains at 11% of Group loans, with onshore exposure at S$6bn and offshore exposure at S$26bn. Nonetheless, customers include mainly top state-owned enterprises, large local corporates, as well as OCBC’s network customers. Less than one-third of the Group’s Mainland China onshore exposure (S$2bn) are corporate real estate loans, largely lending to the bank’s network customer. NPL ratio for non-bank Mainland China loans dipped to 0.3% from 0.5% in the previous quarter.

NPL: Non-performing assets rose 4% QoQ, due to new NPA formation of S$804mn mainly from the downgrades of secured consumer loans in Malaysia offset by recoveries and upgrades of S$359mn mainly from several corporate accounts in the oil and gas support vessels and services sector. We expect loans under relief to nudge higher as the COVID situation recovers gradually in Malaysia and Indonesia. In anticipation of this, management set aside S$185mn of SPs this quarter mainly for corporate and consumer accounts in Malaysia and Indonesia.

Investment Action

Maintain BUY with an unchanged target price of S$14.22

We maintain our BUY recommendation with an unchanged GGM target price of S$14.22. We raise FY21e earnings by 1.8% as we increase profits of associates. Our TP remains unchanged at 1.24x P/BV and 9.3% FY21e ROE. Catalyst includes lower provisions and higher interest income as economic conditions improve.

• FY20 earnings of S$3.69bn beat our expectation by 27% on lower-than-expected credit costs and higher non-interest income.
• GP fell to S$48mn for a 7bp credit cost, signalling the end of the crisis.
• Strong CET-1 of 15.2% to support pre-COVID DPS of S$0.56 p.a. once restrictions are lifted.
• Upgrade to BUY from NEUTRAL with higher GGM TP of S$13.65, up from S$9.68. FY21e earnings raised by 19% for higher insurance and wealth-management income and lower allowances. Cost of equity in GGM lowered to 7.9% from 9.2% on better risk-to-reward. We peg our TP at 1.19x P/BV and 9.0% FY21e ROE to reflect a better credit outlook.

The Positives

+ Stable interest margins

NIM improved 2bps QoQ from 1.54-1.56% on better funding-cost management. Improved margins lifted NII by 1% QoQ. That said, competitive lending limited room for asset repricing, which could bring down FY21e NIM to 1.50-1.55%.

+ Low GPs

Total allowances of S$285mn were made up of S$237mn in SPs and S$48mn in GPs. Its 7bp credit cost signalled the end of the credit crisis. Some of the SPs that the bank has to recognise in FY21e as a result of asset-quality deterioration can be migrated from S$864mn of GPs already expensed in FY20.

Loans under moratorium fell from S$23.8bn in September 2020 to S$5.7bn, or 2% of the total in January. Of these, 91% were secured. Clarity on asset quality gives confidence in built-up reserves. These consist of an excess of S$405mn in management overlays and S$244mn of macroeconomic variables.

+ Strong capital position

CET-1 improved from 14.4% to 15.2% QoQ. Wing Hang Bank’s migration to internal ratings contributed to 0.5% of the improvement. Capital strength enabled OCBC to resume pre-COVID-19 DPS of S$0.56 p.a. and opens up possibilities of dividend growth once MAS restrictions are lifted.

The bank has also removed discounts to scrip dividends for distribution of S$0.159 for 2H20.

The Negative

- Weak loan growth

Loans grew 1% YoY from S$264bn to S$267bn in a challenging environment. Nevertheless, with improved business confidence and consumer sentiment as the economy recovers, we are confident of mid-single-digit loan growth, as guided by the bank.

Outlook

Economic recovery to accelerate in 2H21

The bank expects a strong recovery by 2H21. Improved consumer confidence is expected to lift business sentiment.

Existing geopolitical tensions are also not expected to worsen, which should pave the way for strong business flows in the region. This would benefit loan growth and fee income.

Investment Action

Upgrade to BUY with higher GGM target price of S$13.65, up from S$9.68

We raise FY21e earnings by 19% for higher insurance and wealth-management income and lower allowances. We also lower COE from 9.2% to 7.9% on lower risks and forecast a 9% FY21e ROE on better capital efficiency.

• 3Q20 earnings dropped 12% YoY but improved 41% QoQ to S$1,028mn as allowances halved from previous quarter.
• Fees and commissions were down 9% YoY but recovered to normalised FY19 level of S$500mn per quarter.
• Allowances of S$350mn were only 8% higher YoY despite generally high credit costs. SP dived to S$148mn from S$271mn a year ago.
• Loans under moratorium shrank from 10% to 5% of loan book, reducing risks of NPA formation in FY21.
• Maintain ACCUMULATE with higher GGM TP of S$9.68, from S$8.92 previously. We now peg our TP at 0.92x P/BV and FY21e ROE of 8.6% to reflect a better credit outlook. For sector exposure, still prefer UOB (SGX: U11, Accumulate, TP: S$21.10).

The Positives

+ Non-interest income grew 6% YoY

Life and general insurance income grew another 29% YoY while trading income increased S$255mn YoY. WM fees recovered from their low of S$205mn in 2Q20 to S$252mn. This lifted fees and commissions to S$501mn, comparable to their quarterly run rate in FY19.

+ Allowances halved from a quarter ago

Total allowances of S$350mn were made up of S$148mn in SP and S$202mn in GP. This brought credit cost to 67bps, down from a front-loaded 87bps in 1H20. Total reserves of S$4,618mn provided for NPA coverage of 109%, an increase of 101% QoQ.  Guided credit cost of 50-60bps for FY20 seems reasonable.

The Negative

- NII fell 11% YoY on a 23bp NIM compression

NIM fell from 1.77% to 1.54% YoY and by 6bps QoQ. It is likely to stabilise at such levels given liquidity conditions and low interest rates are likely to persist.

Outlook

Loans under moratorium shrank from 10% of loan book to 5%

Despite stabilising economic conditions, the bank believes recovery will be slow. It expects NPL ratio to come in at the lower end of the 2.5-3.5% range it guided previously. The bank’s heavy provisioning in the first three quarters is likely sufficient to see it through FY21.

Investment Action

Maintain ACCUMULATE with higher target price of S$9.68, up from S$8.92

We hold our estimates for FY20e/FY21e and peg our valuation at 0.92x FY21e P/BV and an 8.6% ROE as allowances start to taper off.

• 2Q20 earnings was below our expectations by 10% on lower NII (-9% YoY) and higher than expected allowances booked for the quarter.
• Non-interest income lifts (+11% YoY) sluggish NII with recovery in market conditions benefiting shareholders’ funds and investment holdings from GEH.
• Credit cost of 91 bps in 2H20 will likely ease over next two years to 50 – 60 bps previously guided by the bank.
• Scrip dividend option at 10% discount will be available for revised semi-annual dividend of S$0.159 per share.
• We maintain ACCUMULATE at a lower target price of S$8.92. (previously S$9.14). Earnings was revised downwards by compressing NIM by a further 5 bps to reflect a prolonged weak interest rate environment.

The Positives

+ Non-interest income grew 11% YoY to S$1.14bn from S$1.03bn in 2Q20 despite poorer fee performance (-16% YoY).

Insurance income and trading income grew 50% and 31% YoY in 2Q20 from S$188mn and S$320mn to S$282mn and S$420mn respectively due to a strong capital market performance in the second quarter. This attributed to a better shareholders’ fund performance within the insurance income and led to reversal of MTM losses in 2Q20 from 1Q20.

The Negatives

- NII fell 9% YoY on a 19 bps NIM compression despite loans growth of 2% YoY.

NIM fell from 1.79% to 1.60% YoY in 2Q20 on interest rate cuts. Second quarter exit NIM of 1.55% will likely see some recovery in 2H20 with asset and deposit re-pricing in subsequent quarters to bring full year NIM between 1.55% - 1.60%, roughly a further 10 bps NIM compression from 1.68% observed in 1H20.

- Write-down of OSV loan book contributed to higher levels of allowances.

OCBC maintains a poor outlook on the OSV sector as muted economic activity will see weakness in demand for the sector that is not likely to recover over the next year. The bank has recorded S$518mn in SP for 2Q20 to bring the sector loan apart from reputable national oil majors down to 0.3% of book value.

Guidance of 100 – 130 bps in credit costs taken over two years remain intact with heightened credit cost of 91 bps recorded in 1H20 will likely see additional allowances undertaken in subsequent quarters reduced to normalised levels.

Outlook

Semi-annual dividend of S$0.159 per share dampens yield attractiveness.

Revised dividend of S$0.159 per share represents a forward dividend for FY20 of S$0.318 per share which is 43% below previous dividend expectation of S$0.56 per share due to a 40% cut from FY19 dividend of S$0.53 as stipulated by MAS.

Scrip dividend will be available at a 10% discount to keep scrip dividend policy intact from recent scrip dividend option provided by the bank despite strong capital position with CET-1 ratio at 14.2%.

Application for loan moratorium in Singapore tapers at lower than expected uptake.

Loan moratorium extended in Singapore represents between 6-7% of loan book value which is below half of the 15% previously expected by bank. 96% of the loans are secured and will ease pressure on NPL formation in subsequent quarters after loan moratorium expires.

Investment Actions

We maintain ACCUMULATE at a lower target price of S$8.92 (previously S$9.14). We revise our TP downwards after lowering NIM estimates by a further 5 bps. FY21 earnings is expected to recover to normalised levels after more allowances were booked in 1H20.