4Q21: Downside Cushioned By Depressed Valuations
4Q21 was a disappointing quarter due to a shortfall in fee income, higher operating expenses and higher provisions. Asset quality deteriorated in Malaysia, Indonesia and Greater China. Management guided mid-to-high single-digit loan growth for 2022. Interest rates are on the rise and we expect OCBC to benefit from NIM expansion in 2H22. 2022 P/B is low at 1.1x. OCBC provides attractive dividend yield of 4.3% for 2022 and 4.6% for 2023. Maintain BUY. Target price: S$15.82.
RESULTS
• Oversea-Chinese Banking Corp (OCBC) reported net profit of S$973m for 4Q21 (down 14% yoy and 20% qoq), below our forecast of S$1,122m.
• Achieved high single-digit loan growth. Loans growth was 8.4% yoy and 1.7% qoq driven by Singapore (+5% yoy), Greater China (+14% yoy) and the rest of the world (+28% yoy). NIM was stable at 1.52%. Net interest income increased 3.9% yoy.
• Insurance resilient but fee income faltered. Fees grew marginally by 2% yoy but pulled back by 7% qoq. Contribution from wealth management contracted 1% yoy and 17% qoq. AUM grew 3% yoy to S$258b. Contributions from life and general insurance were S$299m, up 53% yoy (4Q20 was a low base due to negative impact from higher insurance liabilities after applying a lower discount rate) but flat qoq.
• Cost-to-income ratio elevated at 50.5%. Operating expenses expanded 15% yoy in 4Q21. Staff costs increased 10% in 2021 (increase is smaller at 5% if we exclude impact of government job support grants).
• Asset quality under strain. NPL balance increased 2% qoq. NPL formation was elevated at S$1,057m (3Q21: S$804m). We saw lower NPLs in Singapore (write-offs for legacy oil & gas exposures) but offset by higher NPLs in Malaysia (housing loans under moratorium), Indonesia (loans for the manufacturing sector) and Greater China (delays in project financing (syndicated loans) due to disruptions from the COVID-19 pandemic). Total provisions at S$317m were 11% higher yoy. Loan loss coverage deteriorated 7ppt qoq to 90%.
• Rewarding shareholders with more dividends. The board declared final dividend of 28 S cents, an increase of 12% hoh.
STOCK IMPACT
• Three-year strategy refresh. OCBC plans to tap on four growth drivers: a) rising wealth in Asia through hubs in Singapore and Hong Kong, b) ASEAN-China trade and investment flows, c) new economy and high-growth industries and d) transition to a sustainable low carbon world. It will invest to strengthen its comprehensive regional franchise and accelerate digital transformation. Management aims to achieve growth at CAGR of above 10%.
• Guidance for 2022. Management guided mid-to-high single-digit loan growth for 2022. NIM is expected to be stable at 1.50-1.55%. Credit costs are expected to be 22-25bp (2021: 29bp).
• Sensitivity to rate hikes. Management estimated every 100bp increase in local interest rates will lead to NIM expansion of 18bp.
• SMS phishing scam. OCBC first detected three cases of SMS phishing scams on 8 Dec 21. The number of cases surged and reached double digits on 23 Dec 21. The number of cases reduced significantly on 31 Dec 21 and there were no new cases since early-January. OCBC has made a one-off goodwill payout to scam victims totalling S$14m in 4Q21. It has implemented security measures set out by the Monetary Authority of Singapore (MAS) and Association of Banks in Singapore (ABS). MAS is likely to take supervisory action and impose additional capital requirement for operational risks, similar to those taken on DBS Group Holdings.
EARNINGS REVISION/RISK
• We expect four hikes in 2022 (previous: three hikes), four hikes in 2023 (previous: three hikes) and no hike in 2024 (previous: two hikes).
• We trimmed our net profit forecast for 2022 by 2% as positive impact of an earlier NIM expansion is offset by a combination of lower fee income, higher operating expenses and higher provisions.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower target price of S$15.82, based on 1.24x 2022F P/B, derived from the Gordon Growth Model (ROE: 9.9%, COE: 8.0%, growth: 0.2% (previous: 0.5%)).