NIM expansion setting in
? Quicker NIM expansion (c.9bp) and benign credit cost (c.12bp) could be
2Q22F’s bright spots amid modest market-related wealth mgmt. and treasury.
? We watch out for updated guidance on FY22F NIMs and credit growth as well
as insights to asset quality in view of heftier borrower loan repayments.
? Reiterate Add. Current valuation of 1.0x FY22F P/BV offers an attractive
entry point as NIM expansion progresses. Recession is a key downside risk.
Mgmt guidance on 2H22F growth and credit quality will be key
We expect Singapore banks’ 2Q22F earnings to still be weighed down by market volatility
(risk-off sentiment likely affecting wealth management income and trading activity) amid
macroeconomic headwinds of unabating inflation, uncertainties on interest rates and
recession risk. Nonetheless, NIM expansion and border reopenings across the region (e.g.
shorter quarantine period upon arrival in China) are bright spots for the sector. While
additional Fed Fund Rate (FFR) hikes by the US Federal Reserve (the Fed) bode well for
margins, we are cognisant on the impact on borrowers’ repayment capabilities (e.g.
Singapore fixed rate [for first 2-3 years] mortgages raised to c.3% in Jun 22 vs. c.1.5% in
Jan 22) and expect banks’ results briefings to be centred on the implication on asset quality
(concerns on potentially higher NPLs) and credit growth (whether a contraction is likely).
We expect more material NIM expansion from 2Q22F
We expect OCBC to post c.S$1.3bn net profit for 2Q22F (-2% qoq, +15% yoy). Benchmark
rates have accelerated following the FFR hike of 50bp/75bp in May/Jun 22. As such, we
expect a quicker pace of NIM expansion notwithstanding the c.3-6-month lag time for the
repricing of loan portfolios and stronger outflow of CASA deposits into fixed deposits. In
terms of composition, we understand that 80% of OCBC’s S$ loan book is based on floating
rate, with the remainder 20% largely comprising 2-3 year fixed mortgage loans. Broadly
two-thirds of its US$ loan book is on a floating rate. On balance, average quarterly
3MSIBOR/3MSIBOR/3MLIBOR/1MSORA rose 68bp/89bp/ 99bp/39bp qoq in 2Q22F to
1.2%/1.4%/1.5%/0.6%. We expect OCBC’s NIM to rise c.9bp qoq to 1.64% in 2Q22F.
Based on our analysis, a NIM of c.1.7% in FY22F (vs. our expectation of c.1.6%) would
raise our FY22F EPS forecast by c.7.5%. Meanwhile, we think its loan growth could be
relatively muted in 2Q22F (c.1% qoq) as customers remain cautious. As such, we
anticipate loan-related non-II income lines to be softer qoq as well.
Credit costs likely to stay benign but more overlays possible
The asset quality of OCBC’s loan portfolio is likely to be contained; the bank does not see
particular weaknesses in any of its portfolios and remains watchful on elevated mortgage
rates, energy prices and commodity trading. We understand that its stress tests show that
its (S$) housing loan portfolio customers are able to maintain a total debt service ratio
(TDSR) of 55% or below, even when factoring in c.3.5% (S$) mortgage rates. We think
2Q22F credit costs could remain benign at c.12bp in 2Q22F. Risks to this call is if OCBC
shores up on its management overlays as a precautionary step (1Q22: c.S$400m). A
significant pick-up of ASEAN-China trade flows as China re-opens is a key catalyst