OCBC: NIM peaked during 3Q23
- 3Q23 results largely in line with consensus
- 3Q23 NIM improved 1bps q-o-q to 2.27%; 4Q23 NIM likely to decline q-o-q
- We revise our forecasts by 1%-2% through FY25F, largely on higher credit cost assumptions
- Maintain HOLD, TP S$13.70
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Net interest income improved on higher NIM. 3Q23 net interest income of S$2.5bn rose 17% y-o-y/3% q-o-q, as 3Q23 saw a 1bps improvement q-o-q in NIM to 2.27%. Meanwhile, loan growth was -2% y-o-y/flat q-o-q.
Higher non-interest income supported by fee income. Non-interest income of S$973m improved 4% y-o-y/declined 9% q-o-q, led by higher fee income and improved investment performance, which offset lower insurance income. Net fees and commissions rose 2% y-o-y/7% q-o-q to S$461m, driven by stronger wealth fee, loans, trade, guarantees, remittances, and other fees, although net new money declined this quarter. The trading income of S$216m (flat y-o-y/-31% q-o-q) declined due to a decline in non-customer trading income on the back of lower MTM valuation on FVTPL securities and derivatives, while profit from GEH, at S$220m (-12% y-o-y/-16% q-o-q), declined, as higher medical claims offset investment gains.
3Q23 saw lower credit costs of 17bps (2Q23: 31bps) as writeback in general allowances offset higher specific allowances. Total allowances were lower q-o-q, at S$184m, 17bps (2Q23: S$252m, 31bps), as there was a writeback of general allowances (stage 1+2): S$ -36m, bps (2Q23: S$200m, 25bps) alongside higher specific allowances (stage 3): S$220m, 21bps (2Q23: S$52m, -4bps). New NPA formation declined q-o-q to S$146m (last four quarters’ average: S$160m), driven by declines across the key markets of Singapore, Malaysia, Indonesia, and Greater China. The NPL ratio improved to 1.0% as net recoveries/upgrades offset new NPAs and the allowance coverage rose to 139% (2Q23: 131%).
Updated 2023 management guidance. As loan growth remains challenging, the loan growth guidance has been revised downwards to a low-single-digit rate of growth (2Q23: low to mid-single digit). Management now guides for a CIR of 40% for FY23F (previous: Low range of 40%-45%). Management has also revised its NIM guidance to 2.25%, from >2.2% previously.
Takeaways from management briefing
Hopeful of some upside to FY23F NIM guidance. September exit NIM of 2.23% was lower than 3Q23 NIM of 2.27% due to an uptick in deposit costs and wholesale funding costs. OCBC saw higher wholesale funding costs because of the temporary funding needs that arose due to the redemption of AT1 securities in August, which was supplemented by wholesale funding and should be a one-off impact. Management continues to be conservative, as there is usually some competition for liquidity during 4Q23 and management does not think there is room to reprice during 4Q23. During 3Q23, OCBC was able to let go of some expensive fixed deposits and beef up cheaper CASA.
More details on specific allowances and asset quality, maintain FY23F credit cost guidance of 20bps. Specific allowances were higher in 3Q23, driven by corporate accounts in key markets across a range of sectors not related to Hong Kong CRE. Management has been adjusting its MEV over the past few quarters, for instance, by allocating more general allowances for the Greater China RE market.
In addition, there were also some reversal of SPs. For example, OCBC made allowances for a project in Greater China that experienced delays due to supply chain disruptions in 2021. Now, the project has been completed and is generating revenue.
During 3Q23, OCBC has had insignificant exposure to anti-money laundering case and will write NPLs as appropriate. There was an increase in NPLs in the rest of the world, driven by an ASEAN construction corporate name. Back in 3Q22, OCBC also downgraded a single real estate customer in its Greater China portfolio, and this account has been fully paid during 3Q23 and upgraded from the status of an NPL, driving some of the decline in the Greater China NPL. While OCBC did not give any guidance for FY24F, management does expect FY24F credit costs to be higher.
Dividends and capital. Management reiterated that they are committed to a dividend payout ratio of 50% and highlighted that FY22A saw a 53% dividend payout ratio. During May 2022, the MAS has imposed an additional capital requirement of S$330m on OCBC due to phishing scams. This has been released during Oct 2023 and will be reflected in 4Q23.
| FY Dec | 3Q2022 | 2Q2023 | 3Q2023 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Net Interest Income | 2,099 | 2,389 | 2,456 | 17.0 | 2.8 |
| Non-Interest Income | 932 | 1,066 | 973 | 4.4 | (8.7) |
| Operating Income | 3,031 | 3,455 | 3,429 | 13.1 | (0.8) |
| Operating Expenses | (1,304) | (1,355) | (1,366) | 4.8 | 0.8 |
| Pre-Provision Profit | 1,727 | 2,100 | 2,063 | 19.5 | (1.8) |
| Provisions | (154) | (252) | (184) | 19.5 | (27.0) |
| Associates | 256 | 250 | 254 | (0.8) | 1.6 |
| Exceptionals | 0.00 | 0.00 | 0.00 | - | - |
| Pretax Profit | 1,829 | 2,098 | 2,133 | 16.6 | 1.7 |
| Taxation | (338) | (388) | (323) | (4.4) | (16.8) |
| Minority Interests | 0.00 | 0.00 | 0.00 | nm | |
| Net Profit | 1,491 | 1,710 | 1,810 | 21.4 | 5.8 |
| Growth(%) | |||||
| Net Interest Income Gth | 23.5 | 2.2 | 2.8 | ||
| Net Profit Gth | 16.4 | (9.0) | 5.8 | ||
| Key Ratio (%) | |||||
| NIM | 2.1 | 2.3 | 2.3 | ||
| NPL ratio | 1.2 | 1.1 | 1.0 | ||
| Loan-to-deposit | 85.0 | 78.8 | 79.7 | ||
| Cost-to-income | 42.2 | 38.5 | 39.1 | ||
| Total CAR | 16.9 | 17.8 | 16.9 |
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