• Stay NEUTRAL, new SGD13.70 TP from SGD13.20, 6% upside with c.6% FY24F yield. OCBC Bank’s 1H23 earnings are in line, despite a jump in loan allowances as it bulked up LLC. Management also gave more details on the SGD3bn incremental revenue it expects to achieve from its earlier announced refreshed strategy, which it estimates will lead to a 1ppt uplift in ROE. While positive, we think China’s macroeconomic softness and NIM headwinds in the near term will likely cap its share price performance.

• 1H23 results are in line, with net profit of SGD3.6bn (+38% YoY) at 51% of our and Street FY23F earnings. Reported ROAE improved to 14.3% (FY22: 11.1%) while CET-1 remained robust at 15.4% (4Q22: 15.5%). An interim DPS of 40 SG cents (1H22: 28 SG cents) was declared, which translates to a payout ratio of 50% and in line with its guidance. 2Q23 net profit fell 10% QoQ due to higher loan allowances (+116% QoQ, +194% YoY) as OCBC booked in higher general provisions for non-impaired assets. Part of this is for its commercial real estate (CRE) exposure, despite the portfolio holding up. That aside, PIOP rose 1% QoQ on higher non-II from insurance and trading, partly offset by a 4bps QoQ NIM squeeze and negative JAWS. Opex rose 7% QoQ while CIR grew 140bps QoQ to 38.5%, albeit below the 40-45% target.

• Loan growth ticked up. OCBC added 1% QoQ (flat YoY) to its loan book, driven by the Singapore division – bringing YTD growth to 1%. Meanwhile, deposits rose 2% QoQ or 7% YoY, led by new money inflows into fixed deposits. Group LDR was at 78.8% (1Q23: 79.2%, 2Q22: 84.4%). The stronger deposit growth and mix led to the sequential NIM pressure. Nevertheless, 2Q23 and exit NIM of 2.26% (1H23: 2.28%) remain north of its >2.2% guidance. Coupled with July’s US Federal Funds Rate (FFR) hike, this has given OCBC more confidence over its NIM guidance.

• Credit cost guidance stayed at c.20bps. Non-performing assets fell 2% QoQ on recoveries and upgrades in Singapore, Malaysia and Indonesia. This was partly offset by the 40% QoQ rise in NPLs from “Rest of the World” following the downgrade of a corporate account in the CRE space in the US. That said, OCBC thinks this was an isolated case, and does not see any signs of stress in its loan portfolio. Loans to the CRE office sector made up 14% of group loans, with exposure to developed markets and the US at 4.5% and 0.8% of group loans. Average LTV is 50-60%. As such, while the NPL ratio was stable QoQ at 1.1%, its LLC rose to 131% (1Q23: 121%).

• Other highlights: OCBC shared more colour on its strategy to deliver an incremental SGD3bn in revenue over the next three years. Wealth and trade is expected to form 70% of the incremental revenue, while new economy and sustainability make up the rest. The bulk of this revenue is expected to be backloaded, ie 17%, 33% and 50% to be felt in 2023, 2024 and 2025.

• Earnings forecasts are unchanged. However, we raise our TP to SGD13.70 from SGD13.20 after rolling forward our BVPS to end-2024. Our TP includes a 2% ESG premium, based on our in-house ESG methodology.

Source: RHB Research - 7 Aug 2023