OCBC: Higher dividends for FY23
- 4Q23 net profit below expectations
- 4Q23 NIM improved 2bps q-o-q
- Declared 2H23 DPS of 42 Scts; full-year dividend payout ratio at 53%, in line with expectations
- Maintain HOLD with higher TP of S$14
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Higher non-interest income supported by increased trading and investment income. Non-interest income of S$811m improved 32% y-o-y/declined 17% q-o-q, driven by lower insurance income and net gains from the sale of investment securities. Net fees and commissions of S$460m (+16% y-o-y/flat q-o-q) were resilient despite the typical seasonality effect in 4Q23, driven by stronger wealth fees, loans, trade, guarantees, remittances, and other fees. The trading income of S$222m (+22% y-o-y/+2% q-o-q) saw higher non-customer flow q-o-q, while profit from GEH was lower at S$88m (-60% y-o-y/-12% q-o-q), due to higher medical claims.
4Q23 saw higher credit costs of 20bps (3Q23: 17bps) due to higher general allowances. Total allowances were higher q-o-q, at S$187m, 21bps (3Q23: S$184m, 17bps), as there was a writeback of general allowances (stage 1+2): S$182m, 21bps (3Q23: wrote back S$36m, -4bps) alongside lower specific allowances (stage 3): S$5m, 0bps (3Q23: S$184m, 21bps). General allowances taken during the quarter relate to overlays on the commercial real estate (CRE) sector. OCBC believes the extra overlays in ECL1+2, which are procyclical, reflect on some geographies with weaker real estate markets, though no NPLs arise from these markets. New NPA formation was S$54m, declining q-o-q (3Q23: S146m, FY23 averaged S$101m). The NPL ratio remained flat q-o-q at 1.0% and the allowance coverage rose to 151% (3Q23: 139%).
2024 management guidance. As loan growth remains challenging, management has guided for low single-digit loan growth. The ROE is expected to be between 13%-14% while credit costs are expected to range between 20-25bps. Management expects NIM to be 2.20% to 2.25%.
Takeaways from analyst briefing
Capital management and dividends. Management reiterates that its capital strength continues to support organic and inorganic growth, as well as allows OCBC to navigate uncertainty while optimising shareholder returns. OCBC is intensely working on its capital position while continuing to be committed to a 50% dividend payout ratio and looking at subsidiaries. For instance, GEH has increased its dividend payout ratio, which will flow through to OCBC. Management shared that they are considering more proactive and aggressive targets to share at a later time. The transition to Basel 4 will cause a transition impact of up to +2% on the CET1 ratio, but this will be slowly eroded over time, with the final CET1 ratio still landing over the 14% target. During 2023, OCBC made sizeable progress towards RWA optimisation for single premium insurance financing, which realised RWA savings of S$5-6bn. Most of the optimisation has been executed, and going forward, RWA growth will track loan growth more closely, on top of the impact from the Basel 4 transition.
Managing cost of funds going forward. December exit NIM is 2.26% (4Q23: 2.29%). Management will be actively managing deposit costs ahead and needs to do more work to manage funding costs. OCBC did another round of fixed deposit cuts in early February. Loan yields continue to be competitive, especially for high-quality assets like mortgages. The duration of investment securities is two to three years currently. NIM guidance assumes four rate cuts beginning 2H24. NIM sensitivity: Every 1bps change in the interest rate over OCBC’s four major currencies will impact net interest income by S$6-7m on an annualised basis.
Loan growth outlook. Sees pockets of opportunities in various sectors like energy, power, utilities, technology, digital infrastructure, and student accommodation. OCBC believes that China shows signs of bottoming out, and OCBC continues to see China customers interested in bringing investments into ASEAN.
Details on CRE exposure. OCBC has stopped financing US CRE for more than one year, as it foresaw the downturn. Current borrowers in the US CRE market are strong sponsors, and they will either top up or restructure their loans. HK CRE LTV is at ~40%+ for secured loans, while HK has a fair bit of unsecured loans – this mostly relates to large HK conglomerates with huge resources. OCBC predicts HK market valuations would come down with a rising vacancy rate for HK CRE but remains comfortable with the overall market at this point in time. OCBC believes that there are still keen buyers for HK prime properties but no sellers in the meantime, as sellers have holding power, with strong sponsors coming in to top up and pay for loans – an impending rate cut will put a floor to how far transaction valuations can come down. For HK SME, OCBC looks at both LTVs and guarantees from sponsors, and believes that there are sufficient reserves, even if valuations were to come down with LTV at 45%.
FY Dec | 4Q2022 | 3Q2023 | 4Q2023 | % chg yoy | % chg qoq |
Net Interest Income | 2,386 | 2,456 | 2,462 | 3.2 | 0.2 |
Non-Interest Income | 646 | 973 | 811 | 25.5 | (16.6) |
Operating Income | 3,032 | 3,429 | 3,273 | 7.9 | (4.5) |
Operating Expenses | (1,128) | (1,366) | (1,336) | 18.4 | (2.2) |
Pre-Provision Profit | 1,904 | 2,063 | 1,937 | 1.7 | (6.1) |
Provisions | (314) | (184) | (187) | (40.4) | 1.6 |
Associates | 155 | 254 | 189 | 21.9 | (25.6) |
Exceptionals | 0.0 | 0.0 | 0.0 | - | - |
Pretax Profit | 1,745 | 2,133 | 1,939 | 11.1 | (9.1) |
Taxation | (302) | (323) | (317) | 5.0 | (1.9) |
Minority Interests | 0.0 | 0.0 | 0.0 | - | - |
Net Profit | 1,443 | 1,810 | 1,622 | 12.4 | (10.4) |
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Growth (%) |
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Net Interest Income Gth | 13.7 | 2.8 | 0.2 |
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Net Profit Gth | (3.2) | 5.8 | (10.4) |
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Key ratio (%) |
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NIM | 2.3 | 2.3 | 2.3 |
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NPL ratio | 1.2 | 1.0 | 1.0 |
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Loan-to deposit | 83.3 | 79.7 | 80.5 |
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Cost-to-income | 36.3 | 39.1 | 40.0 |
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Total CAR | 17.7 | 16.9 | 18.1 |
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