• 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%.