OCBC: NIM likely to have peaked
- 1Q23 revenue of S$3.4bn in-line; net profit of S$1.9bn ahead of consensus
- NIM declined 1bps q-o-q to 2.30% – 1Q23 saw first quarterly decline in current cycle
- FY23F NIM guidance raised to c.2.2% (prev. 2.1%) but loan growth guidance revised down to low- to-mid-single digit
- Maintain HOLD with unchanged TP of S$13.00
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1Q23 net profit ahead of expectations on lower-than-expected provisions and operating expenses. OCBC reported a 1Q23 revenue of S$3.4bn (+27% y-o-y/+12% q-o-q) in line with estimates, and a net profit of S$1.9bn (+39% y-o-y/+44% q-o-q) above consensus expectations due to lower-than-expected provisions, as well as operating expenses on the back of a change in accounting standard for GEH to SFRS(I) 17 from SFRS(I) 4. Operating costs grew 3% y-o-y but declined 4% q-o-q due to a decline in “other” expenses arising from the deduction of insurance-related expenses against insurance revenue, resulting in a cost-to-income ratio of 37.1% for 1Q23 (4Q22: 43.3%). Capital ratios remained strong, with CET1 and total CAR at 15.9% (4Q22: 15.2%) and 18.4% (4Q22: 17.7%) respectively, the highest among peers.
Net interest income remained resilient. 1Q23 net interest income of S$2.3bn increased 56% y-o-y from a 5% growth in average assets and a strong 75bps NIM expansion to 2.30% but declined 2% q-o-q on a shorter quarter. Adjusting for the shorter days, net interest income would have remained largely unchanged q-o-q. Meanwhile, loan growth was flat y-o-y and q-o-q, with sustainable financing loans rising 33% y-o-y to S$32bn, accounting for 11% of total loans.
Strong performance from non-interest income. Non-interest income of S$1.0bn declined 11% y-o-y but increased 65% q-o-q. Net fees and commissions of S$453m (-13% y-o-y/+14% q-o-q) were mainly driven by wealth management fees (-26% y-o-y/+14% q-o-q) as investor sentiment improved while trading income of S$251m (+12% y-o-y/+70% q-o-q) was attributed to higher customer and non-customer flow income. OCBC also recognised S$37m net gains from investment securities and others in 1Q23 – from a loss of S$57m in 4Q22. Profit from life insurance swelled to S$238m following GEH’s adoption of SFRS(I) 17, despite y-o-y and q-o-q declines in Total Weighted New Sales (TWNS) and New Business Embedded Value (NBEV).
Credit costs improved. 1Q23 saw lower credit costs of 12bps (4Q22: 35bps) on the back of lower allowances, both general and specific. Total allowances: S$110m, 12bps (4Q22: S$314m, 35bps); general allowances (stage 1+2): S$54m, 6bps (4Q22: S$213m, 27bps); and specific allowances (stage 3): S$56m, 6bps (4Q22: S$101m, 8bps). New NPA formation of S$174m, and lower q-o-q across both corporate and consumer segments (4Q22: S$432m), was offset by recoveries of S$258m in the quarter (4Q22: S$271m). NPL ratio declined to 1.1% (4Q22: 1.2%) and allowance coverage rose to 121% (4Q22: 114%).
Takeaways from analyst briefing
NIM outlook. With a base case assumption of a constant Fed funds rate for the rest of the year with rate cuts coming in only in FY24F, management raised its FY23F NIM guidance to ~2.2% (prev. ~2.1%), implying a ~6bps decline q-o-q, even though there is still a possibility of closing FY23F at above 2.2%. Management does not see more room for loans to reprice higher, as there has been competition for quality loans while funding costs is also catching up, putting pressure on margins. Management is working to increase fixed rate loan book and extend duration.
Deposits. Management attributed a large portion of the increase in deposits to net new monies to the Bank of Singapore (BOS) due to its strong brand name and investors’ flight to quality sentiment, as well as a shift from CASA. Management also shared that fixed deposits campaigns target to maintain market presence, on top of ensuring an optimal LDR. Going forward, management does not anticipate higher cost of funds to come from fixed deposits (likely peaked during 1Q23), but rather from CASA, which still has room to reprice in 2H23. The year-end CASA ratio is targeted at ~50% (1Q23: 47%).
Commercial real estate details. While 30% of the loan book overall is in real estate, more than 80% of these are to network customers who are mostly in Asia. Exposure to developed markets such as the US, the UK, Australia, etc., is about 10% of the real estate book, but mainly to network customers that are fully secured with weighted LTV of 50% on average. Management shared that the overall real estate book is quite well diversified, although office is a bigger part, but they have stress-tested and are comfortable with the portfolio.
Asset quality. Management believes that higher NPLs in 2H23 should not come as a surprise due to the macroeconomic environment (recessionary pressures/high interest rates), hence the overall quality of portfolio could be impacted but there is no systemic risk currently. <1% of the overall loan book is on the watchlist, including sectors like hospitality and transport, but has halved since the peak during the pandemic. Management overlays are 40-50% of GP reserves (S$2.2bn) and sufficient.
GEH impact. Under SFRS(I) 17, insurance-related expenses are netted against insurance revenue, with no impact at the operating profit level but expenses and revenue will decline. Excluding the impact of lower expenses in 1Q23, CIR is closer to ~39% on a group basis (1Q23: 37.1%). As more of the GEH portfolio is moved into FVOCI, a significant portion of previous volatility of insurance assets and liabilities will be removed.
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