• 2Q23 earnings of S$1.71bn were slightly above our estimates. It came from higher net interest income and insurance income offset by lower fee income and higher allowances. 1H23 PATMI was 53% of our FY23e forecast. 2Q23 DPS was up 43% YoY to 40 cents. We raise our FY23e DPS from S$0.80 to S$0.85.
• NII grew 41% YoY as NIM surged 55bps YoY to 2.26% and loan growth remained flat YoY. NIM guidance was raised from 20% to above 2.20%. Allowances rose 250% due to higher GPs (and management overlays) as credit costs increased 23bps YoY to 31bps.
• Maintain BUY with an unchanged target price of S$14.96. We raise FY23e earnings by 4% as we increase NII estimates for FY23e due to higher NIMs and lower expenses, offset by lower fee income 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 15.4% CET 1, and fee income recovery from China’s re-opening.

The Positives

+ Net interest income surged 41% YoY. NII grew 41% YoY led by NIM improvement of 55bps YoY to 2.26% despite loan growth remaining flat YoY. NIM expansion was mainly due to the continued and rapid rise in interest rates during the year. However, NII rose only 3% QoQ as NIM declined 4bps QoQ as asset growth was partly offset by the lower NIM as higher funding costs outpaced the rise in loan yields. Nonetheless, OCBC has increased its NIM guidance for FY23e from 2.20% to above 2.20%.

+ Insurance income up 26% YoY. Insurance income grew 26% YoY and 10% QoQ. The growth was mainly attributable to improved investment performance and the adoption of SFRS(I) 17 reporting standard. Total weighted new sales and new business embedded value (NBEV) were S$726mn and S$351mn respectively, while NBEV margin improved to 48.4% (2Q22: 37.1%) due to favourable product mix.

The Negatives

– Fee income declined YoY and QoQ. Fee income declined 10% YoY and 5% QoQ as higher loan-related and investment banking fees were offset by softer wealth management-related fees from a decline in customer activities amid a risk-off investment environment. Nonetheless, the Group’s wealth management income grew 56% YoY to S$1.14bn (2Q22: S$729mn) and contributed 33% to the Group’s total income. OCBC’s wealth management AUM was 10% higher YoY at S$274bn (2Q22: S$250bn) driven by continued net new money inflows.

– Allowances up 250% YoY, credit costs at 31bps. Management set aside 31bps of credit cost for 2Q23 (1Q23: 12bps), the second highest in six quarters, even though asset quality is still benign, with new NPAs during the quarter only at S$289mn (1Q23: S$174mn) and NPL ratio at 1.1%. 2Q23 total allowances rose 250% YoY mainly due to an increase in GPs, which were mainly set aside for changes in risk profiles, macro-economic variables updates and management overlays (40% of GP or ~S$1bn). Notably, rest of the world NPAs rose 84% YoY to S$549mn mainly due to the downgrade of a corporate account in the Commercial Real Estate sector in the US, for which OCBC sees no systemic risk.

– CASA ratio continues to dip. The Current Account Savings Accounts, or CASA ratio, fell 15.6% points YoY to 45.3% due to the high interest rate environment and a move towards fixed deposits, FDs. Nonetheless, total customer deposits increased 7% YoY to S$372bn underpinned by strong growth in FDs. The Group’s funding composition remained stable with customer deposits comprising 79% of total funding.

Outlook

Loan growth: Loan growth was flat YoY in 2Q23, falling below the bank’s guidance for FY23e. However, management said that it expects a slower pace of economic growth and has maintained its guidance of low to mid-single loan growth for FY23e. 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 the rest of FY23.

Fee income: With the re-opening of China, OCBC is positive on the broader outlook and expects the re-opening to support China-Southeast Asia trade and investment flows. OCBC has recently launched a private banking unit in Malaysia and mainland China in order to strengthen its WM services while also hiring for the business. We could expect high single-digit fee income growth for FY23e.

Commercial real estate office sector:  The commercial real estate office sector loans are mostly to network customers in key markets with a proven track record and financial strength. Overall LTVs are low at around 50% to 60% and are mostly secured. Overall, the commercial real estate office sector loans make up 14% of total loan book, with two-thirds of loans to key markets of Singapore, Malaysia, Indonesia, and Greater China. Loans to developed markets including Australia, the United Kingdom and the United States are largely to network customers with strong sponsors. The US accounted for less than 1% of total Group loans and mostly secured by Class A office properties.