+ NIM caught up by expanding 6 bps YoY and 5 bps QoQ. The pleasant surprise in NIM expansion was primarily due to the repricing of loans kicking in during 3Q18 which contributed to approximately 4 bps of the QoQ increase, and the release of surplus USD deposits back to the market contributed to the remaining 1 bps. (Recall that last quarter’s softer NIM was due to OCBC’s reluctance in raising loan pricing to provide stability for customers.) In this quarter, the repricing of loans portfolio came mostly from Singapore, and the full impact will be felt in 4Q18 when Hong Kong reprices its loans. We expect NIM to continue expanding in the next quarter but more moderately as compared to this quarter.
+ Loans growth remained robust at +10.4% YoY. Loans expanded the most in Greater China (15.0% YoY) and Singapore (+8.0% YoY). Malaysia loans grew 7.2% YoY, the highest in 14 months. Non-bank customer deposits fell by 1.2% while OCBC’s LDR increased to 88.5% (2Q18: 85.9%) due to the release of excess liquidity. Management is comfortable with current liquidity levels and guides LDR in the range of 85-90%.
+ NPL stable at 1.4%; Credit Costs normalised to 14 bps. NPL formation rose 22.0% QoQ and half of this increase was due to housing loans while the rest was due to the trade industry. There is no concentration of new NPL from any sector in particular. Management guided credit cost for 2019 at 12-15 bps.
+ Non-interest income achieve relative stability in a volatile market by growing 0.4% YoY. Fee income was underpinned by growth in WM, Trade and Loan related fee income of 6%, 11% and 7% respectively. The decrease in insurance revenue was mainly due to a fall of 28% in life assurance profit (last year recorded higher marked-to-market gains due to favourable market conditions). Increase in net trading income of 81% YoY offset the 94% YoY decrease in net realised gains from investment securities.
– CASA ratio dipped to 47.5% in 3Q18 (3Q17: 50.5%). The fall in CASA balance was due to some migration of CASA balances to fixed deposits, structured products, including single premium products offered by GEH during the quarter and retails bonds.
– CIR increased to 42.0% (3Q17: 41.4%), due to the rise in operating costs of 6.8% YoY, while total income rose 5.3% YoY. Growth in operating costs was driven by a 7.1% YoY rise in staff costs associated with annual base salary increments and a rise in expenses linked to business volume growth.
The NIM outlook for the next quarter would be a slight bias on the positive side of this quarter’s NIM of 1.72%. OCBC reiterated their repricing stance of ensuring that the rise in interest is sustainable enough before repricing to avoid instability to customers. Hence, NIM improvements might be bumpy in the next few quarters. The full impact of NIM repricing will be seen in 4Q18 as Hong Kong reprices its loans. Hong Kong’s loans portfolio is pegged to HIBOR (40%), prime rates (40%) and fixed rate (20%); a rise in prime rates would, therefore, be very beneficial.
The O&G sector’s NPL might only see a recovery in 2H19 because the increase in oil prices are not substantial enough to reflect a rise in charter rates. Oil price rose, but charter rates are still not indicating a similar recovery.
If the trade war escalates, the management expects China and Hong Kong to be most impacted, followed by Singapore and Malaysia. If manufacturers decide to shift their supply chain to South East Asia, Vietnam would likely benefit the most, followed by Malaysia and Thailand. In any case, a trade war will shrink the entire global economy, and it is inevitable that everyone will be affected.
In conclusion, earnings were boosted by robust loans growth, NIM expansion and low allowance. With the expectation of one more rate hike in December and three more in 2019 (according to the FOMC dot plots), NIM will continue to expand as OCBC reprices up its loans as interest rates rise.