A relatively conservative view on margins
- Further NIM expansion is to be expected in coming quarters, although mgmt. is more conservative on FY23F NIMs given rising CASA outflow.
- Stress tests did not reveal systemic asset quality concerns.
- Reiterate Add with lower TP of S$13.70 as we raise our risk-free rate. Clarity on its NIM outlook and capital management plans are a key re-rating catalyst.
OCBC expects growth in Asia to continue, but remains watchful
The global macroeconomic outlook continues to be uncertain but OCBC remains positive on growth in Asia. The bank’s outlook is underpinned by Singapore employment rates staying robust, benefitting from the re-opening of regional economies as Malaysia and Indonesia are on a path of steady recovery. That said, with greater risk of a recession as the Fed hikes rates, OCBC is watchful on near-term vulnerability.
Second consecutive quarter of market-leading margin expansion…
The continued strength in OCBC’s NIM expansion in 3Q22 (+35bp qoq to 2.06%) was a surprise. We understand that this was in part due to OCBC’s repositioning (over the past couple of years) to focus on investing in digitalisation to drive cash management initiatives aimed at SMEs, corporates and SOEs to build up its CASA franchise. Further, 90% of its loan book is on floating rate. With that, OCBC guides for FY22F NIMs to close at the upperend of c.1.8-1.9%, implying c.2.2-2.3% NIM in 4Q22F (vs. 4Q22F guidance of above 2.1%). Note that exit NIM at end-Sep 22 was 2.15%.
…but conservative c.2.1% NIM guidance for FY23F
Going into FY23F, there will likely be continued CASA outflow into fixed deposits (FDs) given the higher yields. Nonetheless, OCBC expects to be able to maintain its CASA ratio above c.50% over the medium term (56% in 3Q22). For FY23F, management conservatively guides for a c.2.1% NIM. We believe that this implies some NIM compression to come (when Fed pauses/cuts rates) as the potential decline in asset yields move ahead of locked-in (FDs) funding costs. In all, we think that OCBC’s NIM expansion may have been front-loaded in 2Q-3Q22, and expect this to narrow going forward.
Reiterate Add with lower TP of S$13.70 as we raise our risk-free rate
OCBC is comfortable with the credit quality of its portfolio; stress tests (for Greater China risks, property, geopolitical tensions, etc.) did not any indicate systemic risks. On NPLs, retail NPLs relating to moratorium relief loans are steadily being written back (relief loans: 0.2% of total loans). Notably, the writebacks had offset a property exposure relating to a network client (e.g. local developer) expanding into Greater China that was classified as NPL in 3Q22 (estimated c.S$100m-200m exposure, required c.S$47m in impairments). We maintain our c.20bp credit cost estimate for FY23F to account for its smaller mgmt. overlay buffer (we estimate c.S$500m or c.0.2% of loans) vs. peers. Our GGM-based TP is lowered to S$13.70 as we roll over to FY23F and factor in a higher c.4% risk -free rate. Asset quality deterioration as interest rates rise is a downside risk.