Asset quality staying resilient
- Wealth management could remain lacklustre in 2H22F, but NII growth will likely offset this. We expect c.25bp yoy NIM growth in FY22F.
- Lowered FY22F credit cost guidance is a key positive. Onshore Mainland China real estate book (<1% of loans) is stress-tested and resilient.
- Reiterate Add with higher GGM-based TP of S$15.50 as we factor in the more aggressive NIM expansion. Attractive entry point at c.1.1x FY22F P/BV
Recession not on the cards for Singapore
In management’s view, a recession is not on the cards for Singapore at this juncture and regional markets are on a steadier recovery plan . OCBC expects economic growth in Asia to remain positive in 2H22, albeit at a slower pace. In terms of loan growth, the bank is on track to meeting its mid-single digit target for FY22F (1H22: +2.8% YTD). With NIM expansion coming in at a more aggressive pace than expected in 2Q22 (+16bp qoq), further NII upside from the more recent Fed rate hikes in Jun/Jul 22 should cushion softer non-II in 2H22F. On non-II, wealth management income could stay lacklustre in 2H22F as customers remain risk-off amid sustained financial market volatility.
We expect NIMs to rise to c.1.79%/2.06% in FY22F/23F
OCBC’s strong NIM expansion in 2Q22 was mainly a result of higher benchmark rates transmitting into higher asset yields, but with funding costs not yet having caught up. We understand that the transition to SORA-based loans (c.15% of SGD book in 2Q22) given the gradual phase-out of SIBOR/SOR loans had also contributed to NIM surprise given its quicker response time to Fed rate hikes (vs. SIBOR/SOR). That said, management guides that sequential qoq margin expansion may not be as large as 2Q22 as funding costs rise due to customers switching into higher-yielding fixed deposits (from CASA) and stiffer deposit rate competition amongst peers. OCBC’s CASA ratio stood at 61% in 2Q22. Its 2Q22 exit NIM was c.1.8% (vs. 2Q22 quarterly NIM of c.1.71%). Factoring in the Fed rate increasing to c.3.5% by end-2022, a slight cut to c.3.25% by end-2023, and c.3% by end2024, we raise our FY22F/23F/24F NIM estimates to c.1.79%/2.06%/2% (FY21: 1.54%).
Onshore Mainland China real estate loans are resilient
With asset quality staying benign in 2Q22, OCBC guides for its credit cost to trend towards the lower end of c.20-25bp in FY22F. While guidance is improved, this imputes higher (double-digit) credit costs in 2H22 (vs. 8bp in 1H22) to cater for potential macroeconomic headwinds such as persistent inflationary pressures ahead and sustained Russia-Ukraine war. Onshore Mainland China loans came up to c.2% of group loans in 2Q22 (c.S$6bn). Of this portfolio, about one-third was real estate and most of these are to network clients (e.g. Singapore developer expanding into China). Having stress -tested this portfolio, OCBC is not seeing structural asset quality concerns but has nonetheless allocated some additional management overlays to reflect potential downside ri sks mentioned. We pen in c.18bp credit costs in FY22F to factor in its portfolio resilience (from c.25bp previously).
