1Q22 results exceeded expectations due to strong contribution from insurance of S$330m, net trading income of S$225m and lower credit costs of only 6bp. New NPL formation has normalised and NPL ratio improved 0.1ppt qoq to 1.4%. Interest rates are on the rise and we expect NIM to improve to 1.58% in 2022 and expand 13bp to 1.71% in 2023. 2022 P/B is low at 1.05x. OCBC provides attractive dividend yield of 4.5% for 2022 and 4.8% for 2023. Maintain BUY. Target price: S$14.88.
RESULTS
· Oversea-Chinese Banking Corp (OCBC) reported net profit of S$1,356m for 1Q22 (down 10% yoy but up 39% qoq), above our forecast of S$1,110m.
· Growth from Singapore and developed markets. Loans expanded 8% yoy and 1% qoq in 1Q22. The sequential expansion was driven by Singapore, UK, Australia and the US. OCBC supported its network customers in expansion overseas to acquire logistics, data centre and student accommodation properties. Europe (ex-UK) accounted for less than 1% of total loans. NIM expanded 3bp qoq to 1.55% benefitting from the hike in Fed Funds Rate of 25bp in March and the associated increase in loan yield.
· Customer deposits grew 10% yoy and CASA ratio has improved 0.9ppt yoy to 62.7%.
· Risk appetite affected by the Russo-Ukrainian war. Fees were down 11% yoy but flat qoq in 1Q22. Contribution from wealth management dropped 20% yoy but increased 3% qoq. High net worth clients has turned cautious as they see headwinds from Russia-Ukraine War and heightened geographical tension. AUM grew 1% yoy to S$251b.
· Contributions from life and general insurance was resilient at S$330m in 1Q22, down 30% yoy (high base last year) but was up 10% qoq. It benefitted from mark-to-market gains from a decline in insurance contract liabilities due to utilisation of a higher discount rate to value these liabilities. Net trading income was also strong at S$225m.
· Contribution from Bank of Ningbo increased 22% yoy to S$254m.
· Cost efficiency improved sequentially. Operating expenses increased 5% yoy but receded 7% qoq in 1Q22 (lower discretionary spending and absence of one-off operational charges compared to 4Q21). Staff costs increased 7% yoy.
· NPL formation normalises after taking a hit in 4Q21. New NPL formation was S$296m in 1Q22, significantly lower than S$1,057m caused by delays to syndicated project financing in Greater China disrupted by the COVID-19 pandemic in 4Q21. NPL balance declined slightly by 0.7% qoq due to recoveries and upgrades of S$240m mainly from the offshore support vessel (OSV) sector in Singapore. NPL ratio improved 0.1ppt qoq to 1.4%. Total provisions were 73% lower yoy at only S$44m as OCBC has already set aside sizeable provisions for corporate loans in 4Q21.
STOCK IMPACT· 3-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.
· Positive outlook for ASEAN countries. Asian economies remain resilient and will benefit from easing of safe distancing measures and resumption of air travel. In particular, Malaysia and Indonesia will benefit from recovery in domestic consumption and higher energy and commodity prices. Many multinational companies have adopted the China + 1 strategy and plan to setup alternative production facilities within ASEAN. Management will closely monitor the COVID-19 outbreak in Greater China. It serves Chinese customers’ offshore activities with loans booked in Singapore and Hong Kong (9% of total loans). Its onshore exposure to Mainland China is small at only 2% of total loans.
· Guidance for 2022. Management guided mid to high single-digit loan growth for 2022. The magnitude of loan growth depends on whether higher inflation affects customers’ expansion plans and how severely economic growth slowdown in respond to higher interest rates. NIM is expected to be higher at 1.55-1.58% (2021: 1.54%). Credit costs are expected to be 20-25bp (2021: 29bp).
· Sensitivity to rate hikes. According to OCBC’s annual report 2021, it is estimated that a 100bp parallel upward shift in yield curves for four currencies, Singapore Dollar, US Dollar, Hong Kong Dollar and Malaysian Ringgit, will lead to NIM expansion of 18bp and additional net interest income of S$669m.
· SMS phishing scam. OCBC has made one-off goodwill payout to victims of SMS phishing scam totalling S$14m in 4Q21. It has beef up fraud prevention and implemented security measures set out by MAS and ABS. OCBC has rolled out a kill switch that enables customers to immediately freeze all their current and savings accounts in an emergency. It has established dedicated team and hotline to assist customers encountering possible fraud.
EARNINGS REVISION/RISK
· We expect successive hikes of 50bp during upcoming FOMC meetings on 3-4 May and 14-15 June. We have factored in the impact of Fed Funds Rate rising to 2.5% by end-22. We expect NIM to improve to 1.58% in 2022 and expand 13bp to 1.71% in 2023. We forecast earnings growth of 8.6% in 2023 and 6.5% in 2024.
· We raised our 2022 net profit forecast for by 4% primarily due to the better-than-expected 1Q22 financial performance. We trimmed our 2023 net profit forecast by 1% after adjusting credit costs slightly higher by 1bp to 24bp.
VALUATION/RECOMMENDATION
· Maintain BUY. Our target price of S$14.88 is based on 1.20x 2023F P/B, derived from the Gordon Growth model (ROE: 9.8%, COE: 8.25%, growth: 0.5%).
